Vistaprint 2013 Annual Report Download - page 38

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exchange for the award, which generally is the vesting period. We use the Black-Scholes option pricing model to
measure the fair value of most of our share options and use a lattice model to measure the fair value of share
options with a market condition. The fair value of restricted share units ("RSUs") and restricted share awards
("RSAs") is determined based on the number of shares granted and the quoted price of our ordinary shares on the
date of the grant. The Black-Scholes model requires significant estimates related to the award’s expected life and
future share price volatility of the underlying equity security. The lattice model considers market condition attributes
in its valuation assessment and simulates various sources of uncertainty in order to determine an average value
based on the range of resultant outcomes. The lattice model requires estimation of inputs such as future share price
volatility and a forfeiture rate assessment. In determining the amount of expense to be recorded, we also estimate
forfeiture rates for all awards based on historical experience to reflect the probability that employees will complete
the required service period. Employee retention patterns could vary in the future and result in a change to our
estimated forfeiture rate which would directly impact share-based compensation expense. As a measure of
sensitivity, a 100 basis point change in our forfeiture rate estimate would have resulted in an immaterial impact on
our statement of operations.
For awards with a performance condition vesting feature, when achievement of the performance condition
is deemed probable, we recognize compensation cost on a graded-vesting basis over the awards' expected vesting
periods. Management continually monitors the probability of vesting that is impacted by the achievement of certain
business targets and milestones. Independent factors such as market acceptance, technological feasibility or
economic market volatility could impact the achievement of such awards and contribute to variability in
management's estimate and the recognition of the underlying share-based compensation expense. As the
recognition of the compensation expense is reliant upon management's estimate of the likelihood of achievement of
the award, if the probability increases during any given period, the compensation cost associated with that award
would be accelerated in order to match the estimated outcome. These changes in estimate could result in periods
of high expense fluctuation.
Income Taxes. As part of the process of preparing our consolidated financial statements, we estimate our
income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax
expense, including assessing the risks associated with tax audits, together with assessing temporary and
permanent differences resulting from differing treatment of items for tax and financial reporting purposes. We
recognize deferred tax assets and liabilities for the temporary differences using the enacted tax rates and laws that
will be in effect when we expect temporary differences to reverse. We assess the ability to realize our deferred tax
assets based upon the weight of available evidence both positive and negative. To the extent we believe that it is
more likely than not that some portion or all of the deferred tax assets will not be realized, we establish a valuation
allowance. Our estimates can vary due to the profitability mix of jurisdictions, foreign exchange movements,
changes in tax law, regulations or accounting principles, as well as certain discrete items. In the event that actual
results differ from our estimates or we adjust our estimates in the future, we may need to increase or decrease
income tax expense, which could have a material impact on our financial position and results of operations.
We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which,
additional taxes will be due. These reserves are established when we believe that certain positions might be
challenged despite our belief that our tax return positions are in accordance with applicable tax laws. We adjust
these reserves in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation,
or the change of an estimate based on new information. To the extent that the final outcome of these matters is
different than the amounts recorded, such differences will affect the provision for income taxes in the period in
which such determination is made. Interest and, if applicable, penalties related to unrecognized tax benefits are
recorded in the provision for income taxes.
Software and Website Development Costs. We capitalize eligible salaries and payroll-related costs of
employees who devote time to the development of websites and internal-use computer software. Capitalization
begins when the preliminary project stage is complete, management with the relevant authority authorizes and
commits to the funding of the software project, and it is probable that the project will be completed and the software
will be used to perform the function intended. These costs are amortized on a straight-line basis over the estimated
useful life of the software, which we revised in fiscal 2013 from two years to three years. This change in estimated
useful life increased our pre-tax income for fiscal year ended June 30, 2013 by approximately $2.7 million when
compared to the historical estimated useful life. Our judgment is required in determining whether a project provides
new or additional functionality, the point at which various projects enter the stages at which costs may be
capitalized, assessing the ongoing value and impairment of the capitalized costs, and determining the estimated
useful lives over which the costs are amortized. Historically we have not had any significant impairments of our
Form 10-K