Zynga 2014 Annual Report Download - page 73

Table of Contents
Stock-Based Expense
Prior to our IPO in December 2011, we granted ZSUs to our employees that generally vest upon the satisfaction of both a service-based
condition of up to four years and a liquidity condition, the latter of which was satisfied in connection with our IPO in December 2011. Because
the liquidity condition was not satisfied until our IPO, in prior periods, we had not recorded any expense relating to the granting of our ZSUs. In
the fourth quarter of 2011, after the IPO, we recognized $510 million of stock-based expense associated with ZSUs that vested in connection
with our IPO. This expense is in addition to the stock-based expense we recognize related to outstanding equity awards other than ZSUs as well
as expenses related to ZSUs or other equity awards that may be granted in the future.
For ZSUs granted prior to the IPO, and for awards subject to performance conditions, we recognize stock-based expense based on grant
date fair value using the accelerated attribution method in which compensation cost for each vesting tranche in an award is recognized ratably
from the service inception date to the vesting date for that tranche. For ZSUs granted after the IPO, which are only subject to a service condition,
we recognize stock-based expense based on grant date fair value on a ratable basis over the requisite service period for the entire award.
We estimate the fair value of stock options using the Black-Scholes option-pricing model. This model requires the use of the following
assumptions: expected volatility of our Class A common stock, which is based on our peer group in the industry in which we do business;
expected life of the option award, which we elected to calculate using the simplified method; expected dividend yield, which is 0%, as we have
not paid and do not anticipate paying dividends on our common stock; and the risk-free interest rate, which is based on the U.S. Treasury yield
curve in effect at the time of grant with maturities equal to the grant’s expected life. Option grants generally vest over four years, with 25%
vesting after one year and the remainder vesting monthly thereafter over 36 months. The options have a contractual term of 10 years. If any of
the assumptions used in the Black-Scholes model changes significantly, stock-based expense for future awards may differ materially compared
with the awards granted previously. We record stock-based expense for stock options on a ratable basis over the vesting term.
For stock options issued to non-employees, including consultants, we record expense related to stock options equal to the fair value of the
options calculated using the Black-Scholes model over the service performance period. The fair value of options granted to non-employees is
remeasured over the vesting period and recognized as an expense over the period the services are received.
Stock-based expense is recorded net of estimated forfeitures so that expense is recorded for only those stock-based awards that we expect
to vest. We estimate forfeitures based on our historical forfeiture of equity awards adjusted to reflect future changes in facts and circumstances,
if any. We will revise our estimated forfeiture rate if actual forfeitures differ from our initial estimates.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill and indefinite-lived intangible assets are carried at cost and are evaluated annually for impairment, or more frequently if
circumstances exist that indicate that impairment may exist. When conducting our annual goodwill impairment assessment, we perform a
quantitative evaluation of whether goodwill is impaired using the two-step impairment test. The first step is comparing the fair value of our
reporting unit to its carrying value. We consider our consolidated entity to be our single reporting unit for this analysis. If step one indicates that
impairment potentially exists, the second step is performed to measure the amount of impairment, if any. We record the amount by which the
carrying value of the goodwill exceeds its implied fair value, if any, as impairment.
For our annual impairment analysis performed in the fourth quarter of 2014, our estimates of fair value were based on the market approach,
which estimated the fair value of our reporting unit based on the company’s market capitalization. The result of the impairment analysis showed
that the estimated fair value of the Company exceeded its carrying value. Accordingly, we concluded goodwill was not impaired.
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