8x8 2015 Annual Report Download - page 64

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FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be
recorded at fair value, the Company considers the principal market or the most advantageous market in which it would transact.
The accounting guidance for fair value measurement requires the Company to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. Observable inputs are inputs that reflect the assumptions market participants would use in
valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs
are inputs that reflect the Company's assumptions about the factors that market participants would use in valuing the asset or liability developed
based on the best information available in the circumstances.
The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair
value by requiring that the most observable inputs be used when available. A financial instrument's categorization within the fair value hierarchy
is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:
4
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities that the
Company has the ability to access at the measurement date.
4
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets; quoted prices for
identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets).
4
Level 3 applies to assets or liabilities for which fair value is derived from valuation techniques in which one or more significant inputs
are unobservable, including the Company's own assumptions.
The estimated fair value of financial instruments is determined by the Company using available market information and valuation methodologies
considered to be appropriate. The carrying amounts of the Company's cash and cash equivalents, accounts receivable and accounts payable
approximate their fair values due to their short maturities. The Company's investments are carried at fair value.
ACCOUNTING FOR STOCK
-BASED COMPENSATION
The Company accounts for its employee stock options, stock purchase rights, restricted stock units and restricted performance stock units
granted under the 1996 Stock Plan, 1996 Director 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.
To value option grants, stock purchase rights and restricted stock units under the Equity Compensation Plans for stock-based compensation the
Company 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 fiscal years
2015, 2014 and 2013, the Company used the historical volatility of its stock over a period equal to the expected life of the options. 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 is 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 is based on the Company's history and expectation of future dividend
payout. Compensation expense for stock-based payment awards is recognized using the straight-line single-option method and includes the
impact of estimated forfeitures.
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