8x8 2014 Annual Report Download - page 38

Significant management judgment is required to determine the valuation allowance recorded against our net deferred tax assets, which include
net operating loss and tax credit carry forwards. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we
operate and the period over which our deferred tax assets will be recoverable. During the fourth quarter of fiscal 2012, we reassessed the need
for a valuation allowance against our net deferred tax asset and concluded that it was more likely than not that we would be able to realize a
significant portion of our deferred tax assets. Accordingly, we released most of our valuation allowance related to our deferred tax asset which
resulted in a credit to the income statement of approximately $62.1 million. We determined that a release of a portion of our valuation allowance
was appropriate as a result of the following discrete events: (1) our attainment of three consecutive years of net income, (2) the acquisition of
Contactual in the second quarter of fiscal 2012, (3) the completion of the Section 382 ownership analysis under the Internal Revenue Code for
Contactual in the fourth quarter of fiscal 2012. During the fourth quarters of fiscal 2014 and 2013, we evaluated the need for a valuation
allowance against our net deferred tax asset and concluded that an additional allowance was needed. Therefore, we increased our valuation
allowance related to our state and federal net operating loss and tax credit carryovers which resulted in reversals of previous income statement
credits of approximately $1.3 million and $1.0 million, respectively. We determined that an increase in our valuation allowance was appropriate
as a result of the change in the net income apportionment methodology in California and the acquisition of Voicenet in the third quarter of fiscal
2014. In making this determination, we considered all available positive and negative evidence, including our recent earnings trend and expected
continued future taxable income. As of March 31, 2014, the net deferred tax asset on the consolidated balance sheet represented the projected tax
benefit we expect to realize. We continue to maintain a valuation allowance against the portion of our deferred tax assets that we believe we will
not be able to utilize.
We have received inquiries, demands or audit requests from several state, municipal and 9-1-1 taxing agencies seeking payment of taxes that are
applied to or collected from the customers of providers of traditional public switched telephone network services. We recorded $0.1 million, $0
and $0 of expense for the years ended March 31, 2014, 2013 and 2012, respectively, for estimated tax exposure for such assessments.
Stock-Based Compensation
We account for our employee stock options, stock purchase rights, restricted stock units, and restricted performance stock units granted under the
1996 Stock Plan, 1996 Director Option Plan, 1999 Nonstatutory Stock Option Plan, the 2006 Stock Plan, the 2003 Contactual Plan, the 2012
Equity Incentive Plan, the 2013 New Employee Inducement Incentive Plan and stock purchase rights under the 1996 Employee Stock Purchase
Plan (collectively "Equity Compensation Plans") under the provisions of ASC 718 - Stock Compensation . Under the provisions of ASC 718,
stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense
over the employee's requisite service period (generally the vesting period of the equity grant), net of estimated forfeitures.
Stock-based compensation expense recognized in the Consolidated Statements of Income for fiscal 2014, 2013 and 2012, was measured based
on ASC 718 criteria. Compensation expense for stock-based payment awards is recognized using the straight-line single-option method and
includes the impact of estimated forfeitures. Compensation expense for restricted stock units with performance and market conditions is
recognized over the requisite service period using the straight-line method and includes the impact of estimated forfeitures. ASC 718 requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
To value option grants, stock purchase rights and restricted stock units under the Equity Compensation Plans for stock-based compensation, we
used the Black-Scholes option valuation model. Fair value determined using the Black-Scholes option valuation model varies based on
assumptions used for the expected stock prices volatility, expected life, risk-free interest rates and future dividend payments. For the twelve
months ended March 31, 2014 and 2013, we used the historical volatility of our stock over a period equal to the expected life of the options to
their fair value. The expected life assumptions represent the weighted-average period stock-based awards are expecting to remain outstanding.
These expected life assumptions were established through the review of historical exercise behavior of stock-based award grants with similar
vesting periods. The risk-free interest was based on the closing market bid yields on actively traded U.S. treasury securities in the over-the-
counter market for the expected term equal to the expected term of the option. The dividend yield assumption was based on our history and
expectation of future dividend payout.
34