XM Radio 2009 Annual Report Download - page 166

Programming Costs
Programming costs which are for a specified number of events are amortized on an event-by-event basis;
programming costs which are for a specified season or period are amortized over the season or period 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
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, 2009, 2008
and 2007, we recorded advertising costs of $128,784, $109,253 and $107,485, 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 ASC 718, Compensation — Stock
Compensation. ASC 718 requires all share-based compensation payments to be recognized in the financial
statements based on fair value using an option pricing model. ASC 718 requires forfeitures to be estimated at the
time of grant and revised 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 as 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 hybrid approach for volatility, which weights observable historical volatility and implied volatility of
qualifying 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 ASC 505, Equity. 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 include
warrants, stock options, restricted stock and restricted stock units.
Subscriber Acquisition Costs
Subscriber acquisition costs consist of costs incurred to acquire new subscribers and include hardware
subsidies paid to radio manufacturers, distributors and automakers, including subsidies paid to automakers who
include a satellite radio and a prepaid subscription to our service in the sale or lease price of a new vehicle; subsidies
paid for chip sets and certain other components used in manufacturing radios; device royalties for certain radios;
commissions paid to retailers and automakers as incentives to purchase, install and activate radios; product warranty
obligations; and provisions for inventory allowance. Subscriber acquisition costs do not include advertising, loyalty
payments to distributors and dealers of radios and revenue share payments to automakers and retailers of radios.
F-12
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)