XM Radio 2008 Annual Report Download - page 62

specified number of events are amortized on an event-by-event basis; programming costs which are for a specified
season are amortized over the season on a straight-line basis. We allocate a portion of certain programming costs
which are related to sponsorship and marketing activities to sales and marketing expenses on a straight-line basis
over the term of the agreement.
Advertising Costs
We record the costs associated with advertising in accordance with Statement of Position (“SOP”) No. 93-7,
Reporting on Advertising Costs. Media is expensed when aired and advertising production costs are expensed as
incurred. Market development funds are fixed and variable payments to reimburse retailers for the cost of
advertising and other product awareness activities. Fixed market development funds are expensed over the periods
specified in the applicable agreement; variable costs are expensed at the time a subscriber is activated. During the
years ended December 31, 2008, 2007 and 2006, we recorded advertising costs of $109,253, $107,485 and
$123,553, respectively. These costs are reflected in Sales and marketing expense in our consolidated statements of
operations.
Stock-Based Compensation
We account for equity instruments granted to employees in accordance with SFAS No. 123 (revised 2004),
Share-Based Payment (“SFAS No. 123R”). SFAS No. 123R requires all share-based compensation payments to be
recognized in the financial statements based on fair value using an option pricing model. SFAS No. 123R requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from initial estimates. We use the Black-Scholes-Merton option-pricing model to value stock option awards
and have elected to treat awards with graded vesting as a single award.
Fair value is determined using Black-Scholes-Merton model varies based on assumptions used for the
expected life, expected stock price volatility and risk-free interest rates. We estimate the fair value of awards granted
using the implied volatility of actively traded options on our common stock. The expected life assumption
represents the weighted-average period stock-based awards are expected to remain outstanding. These expected life
assumptions are established through a review of historical exercise behavior of stock-based award grants with
similar vesting periods. Where historical patterns do not exist, contractual terms are used. The risk-free interest rate
represents the daily treasury yield curve rate at the grant date based on the closing market bid yields on actively
traded U.S. treasury securities in the over-the-counter market for the expected term. Our assumptions may change in
future periods.
Equity instruments granted to non-employees are accounted for in accordance with SFAS No. 123R, as
interpreted by EITF No. 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. The final measurement date for the fair value of
equity instruments with performance criteria is the date that each performance commitment for such equity
instrument is satisfied or there is a significant disincentive for non-performance.
Stock-based awards granted to employees, non-employees and members of our board of directors generally
include warrants, stock options, restricted stock and restricted stock units. The share-based payment expense
recognized includes compensation cost for all stock-based awards granted to employees and members of our board
of directors (i) prior to, but not vested as of January 1, 2006, based on the grant date fair value originally estimated in
accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and (ii) subsequent to
December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of
SFAS No. 123R.
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SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)