XM Radio 2012 Annual Report Download - page 98

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SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
distribution channels will perform in all material respects in accordance with specifications in effect at the time
of the purchase of the products by the customer. The product warranty period on our products is 90 days from the
purchase date for repair or replacement of components and/or products that contain defects of material or
workmanship. We record a liability for costs that we expect to incur under our warranty obligations when the
product is shipped from the manufacturer. Factors affecting the warranty liability include the number of units
sold, historical experience, and anticipated rates of claims and costs per claim. We periodically assess the
adequacy of our warranty liability based on changes in these factors.
Research & Development Costs
Research and development costs are expensed as incurred and primarily include the cost of new product
development, chip set design, software development and engineering. During the years ended December 31,
2012, 2011 and 2010, we recorded research and development costs of $42,605, $48,574 and $40,043,
respectively. These costs are reported as a component of Engineering, design and development expense in our
consolidated statements of comprehensive income.
Share-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 be recognized in the financial
statements based on fair value. 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. Share-based compensation expense is recognized ratably over the requisite service period, which is
generally the vesting period, net of forfeitures. We measure restricted stock awards using the fair market value of
the restricted shares of common stock on the day the award is granted.
Fair value as determined using the Black-Scholes-Merton model varies based on assumptions used for the
expected life, expected stock price volatility and risk-free interest rates. In 2012 and 2011, we estimated 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. In 2010, due to the lack of
qualifying actively traded options on our common stock, we utilized a 100% weighting to observable historical
volatility. 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.
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.
Income Taxes
Deferred income taxes are recognized for the tax consequences related to temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes at
each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. In determining the period in which related tax benefits are realized for
book purposes, excess share-based compensation deductions included in net operating losses are realized after
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