Zynga 2015 Annual Report Download - page 72

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 own calculated three year historical rate; 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 have any plans to pay 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. We changed the basis of estimating our expected volatility in the fourth quarter of 2015 from using peer group data in the industry in which we do
business to using our own calculated rate as we now have sufficient historical data (three years of historical trading activity) that we believe provides a reasonable
basis for our estimate. 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.
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