Adaptec 2008 Annual Report Download - page 39

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our policies of revenue recognition, including the deferral of revenues on sales to major distributors; however
these policies do not meet the definition of critical accounting estimates as they do not generally require us to
make estimates or judgments that are difficult or subjective.
Valuation of Goodwill and Intangible Assets
The purchase method of accounting for acquisitions requires estimates and assumptions to allocate the
purchase price to the fair value of net tangible and intangible assets acquired, including in-process research and
development (“IPR&D”). The amounts allocated to IPR&D are expensed immediately. The amounts allocated to,
and the useful lives estimated for, other intangible assets, affect future amortization. There are a number of
generally accepted valuation methods used to estimate fair value of intangible assets, and we use primarily a
discounted cash flow method, which requires significant management judgment to forecast the future operating
results and to estimate the discount factors used in the analysis. If assumptions and estimates used to allocate the
purchase price or used to access impairment prove to be inaccurate, future asset impairment charges could be
required.
Goodwill and intangible assets determined to have indefinite lives are not amortized, but are subject to an
annual impairment test. To determine any goodwill impairment, we perform a two-step process on an annual
basis, or more frequently if necessary, to determine 1) whether the fair value of the relevant reporting unit
exceeds carrying value and 2) the amount of impairment loss, if any. We review our intangible assets for
impairment whenever events or changes in circumstances indicate that their carrying value may not be
recoverable. Measurement of an impairment loss is based on the fair value of the asset compared to carrying
value.
We performed an annual test for impairment of goodwill and intangible assets in the fourth quarter of 2008
and determined that there was no impairment. The assumptions used to test for impairment, including expected
revenues, discount rates, and terminal values, are highly subjective. Valuation models are sensitive to changes in
assumptions, and therefore changes in these assumptions in the future could result in significant impairment
charges or changes to our expected amortization.
Stock-based compensation
Since January 1, 2006, we recognize compensation expense for all share-based payment awards. Under
SFAS 123(R) we measure the fair value of awards of equity instruments and under SFAS 123(R) recognize the
cost, net of an estimated forfeiture rate, on a straight-line basis over the period during which services are
provided in exchange for the award, generally the vesting period.
Calculating the fair value of stock-based compensation awards requires the input of highly subjective
assumptions, including the expected life of the awards and expected volatility of PMC’s stock price. Expected
volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period.
Our estimates of expected volatilities are based on a weighted historical and market-based implied volatility. In
order to determine the expected life of the awards, we use historical data to estimate option exercises and
employee terminations; separate groups of employees that have similar historical exercise behavior, such as
directors or executives, are considered separately for valuation purposes. The expected forfeiture rate applied in
calculating stock-based compensation cost is estimated using historical data.
The assumptions used in calculating the fair value of stock-based awards involve estimates that require
management judgment. If factors change and we use different assumptions, our stock-based compensation
expense could change significantly in the future. In addition, if our actual forfeiture rate is different from our
estimate, our stock-based compensation could change significantly in the future. See Notes 1 and 5 to the
Consolidated Financial Statements for further information on stock-based compensation.
39