8x8 2007 Annual Report Download - page 41

At March 31, 2007, we have a $3.4 million liability related to warrants issued to three investors in three equity financing
transactions in the fiscal years 2006 and 2005. We account for these warrants as liabilities, because the possibility, however
likely or unlikely, that we would be unable to deliver registered shares upon a future exercise of these warrants. The required
accounting for a warrant with an assumed "net cash settlement" provision under EITF 00-19 is to estimate the fair value on the
date of issuance and to record a liability equal to that value with subsequent changes in the fair value recorded as income or
expense at the end of each reporting period under EITF 00-19 . The amount we record as a liability under EITF 00-19 is not,
nor do we intend for it to be an admission or stipulation of the amount that we would owe or be obligated to pay the warrant
holder in the event that we are unable to deliver registered shares to the warrant holder. In fact, we have made no determination
of the amount of liability, if any, that we would owe to the warrant holder in the event of such a breach.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2006, the Emerging Issues Task Force reached a consensus on Issue No. 06-03 “How Taxes Collected from
Customers and Remitted to Government Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net
Presentation)” (“EITF No. 06-03”). We are required to adopt the provisions of EITF No. 06-03 in the first quarter of fiscal
2008. We currently report revenue net of taxes collected and remitted to governmental authorities. We do not expect the
adoption of the provisions of EITF No. 06-03 in the first quarter of fiscal 2008 to have a material impact on our results of
operations and financial condition.
In July 2006, Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes: an Interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements. This Interpretation requires that we recognize in
our financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on
the technical merits of the position. We expect to adopt FIN 48 in the first quarter of fiscal 2008, with the cumulative effect, if
any, of the change in accounting principle recorded as an adjustment to our opening retained earnings. We are in the process of
evaluating the effect of FIN 48 on our results of operations and financial condition.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair
value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value
measurements, but does not require any new fair value measurements. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Early application is
encouraged, provided that the reporting entity has not yet issued financial statements for an interim period within that fiscal
year. We do not expect the adoption of SFAS No. 157 to have a material impact on our consolidated results of operations and
financial condition.
In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statement.” SAB 108 was issued in order to
eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. There are
two error evaluation techniques most commonly used for quantifying the effects of financial statement misstatements: the “roll-
over” and “iron curtain” methods. The roll-over method focuses primarily on the impact of the misstatement on the statement
of operations and ignores the reversal of the carryover effects of prior year misstatements. Because the focus is on the
statement of operations, the roll-over method can lead to accumulation of misstatements on the balance sheet that may be
immaterial to the balance sheet but correction in a single period could be material to the statement of operations. The iron
curtain method focuses primarily on the effect of correcting the accumulated balance as of the balance sheet date, essentially
correcting the balance sheet with less emphasis on reversal of the carryover effects of prior year errors on the statement of
operations. In SAB 108, the SEC staff established an approach that requires quantification of financial statement misstatements
based on the effects of the misstatements under both the iron curtain and roll-over method and is referred to as a “dual
approach.” SAB 108 permits a company to initially apply its provisions either by restating prior financial statements as if the
dual approach had always been used or recording the cumulative effect of initially applying the dual approach as adjustments
to the balance sheet. SAB No. 108 is effective for fiscal years ending after November 15, 2006, with early application for the
first interim period ending after November 15, 2006. We adopted SAB No. 108 in the third quarter of fiscal year 2007 and
such adoption did not have any effect on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS No. 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value. SFAS No. 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal years. Early application is permitted provided
that the reporting entity also elects to apply SFAS No. 157, Fair Value Measurements.
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