Chegg 2015 Annual Report Download - page 94

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Table of Contents
55
These assumptions represent management’s best estimates. These estimates involve inherent uncertainties and the application
of management’s judgment. If factors change and different assumptions are used, our share-based compensation expense could
be materially different in the future. The assumptions required are estimated as follows:
Expected term. The expected term for options granted to employees, officers and directors is calculated as the
midpoint between the vesting date and the end of the contractual term of the options. The expected term for options
granted to consultants is determined using the remaining contractual life. The expected term for shares to be
purchased under our ESPP is calculated as the length of the offering period which is generally six months.
Risk-free interest rate. The risk-free interest rate is the implied yield currently available on the United States
treasury zero-coupon issues, with a remaining term equal to the expected term.
Expected volatility. The expected volatility historically was based on the average volatility of similar public entities
within our peer group. Starting in the fourth quarter of 2015, we have utilized the average volatility of our share
price as we now have over two years of trading history.
Expected dividends. The dividend assumption is based on our historical experience. To date we have not paid any
dividends on our common stock.
In addition to assumptions used in the Black-Scholes-Merton option pricing model, we must also estimate a forfeiture
rate to calculate the share-based compensation expense related to our awards. Estimated forfeitures are determined based on
historical data and management’s expectation of exercise behaviors. We will continue to evaluate the appropriateness of the
forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors. Quarterly changes in the
estimated forfeiture rate can have a significant impact on our share-based compensation expense as the cumulative effect of
adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the
previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the share-based compensation
expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate,
an adjustment is made that will result in an increase to the share-based compensation expense recognized in the financial
statements.
Share-based compensation expense recognized related to PSUs is subject to the achievement of performance objectives
and requires significant judgment by management in determining the current level of attainment of such performance
objectives. Management may consider factors such as the latest revenue forecasts and general business trends in the
assessment of whether or not a PSU award will be obtained. Subsequent changes to these considerations may have a material
impact on the amount of share-based compensation expense recognized in the period related to PSU awards, which may lead to
volatility of share-based compensation expense period-to-period.
We will continue to use judgment in evaluating the assumptions related to our share-based compensation expense on a
prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimates,
which could materially impact our future share-based compensation expense.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have been included in the financial statements. We
currently are providing a valuation allowance on domestic deferred tax assets. If or when recognizing deferred tax assets in the
future, we will consider all available positive and negative evidence including future reversals of existing taxable temporary
differences, projected future taxable income, tax-planning strategies, and results of recent operations.
We record uncertain tax positions on the basis of a two-step process in which (1) we determine whether it is more likely
than not that the tax positions will be sustained on the basis of technical merits of the position and (2) for those tax positions
that meet the more likely than not recognition threshold, we recognize the tax benefit as the largest amount that is cumulative
more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.