Citrix 2006 Annual Report Download - page 32

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when we believe actual returns and other allowances could
differ from established reserves. Our ability to recognize
revenue upon shipment to our distributors is predicated
on our ability to reliably estimate future stock balancing
returns. If actual experience or changes in market condition
impairs our ability to estimate returns, we would be required
to defer the recognition of revenue until the delivery of
the product to the end-user. Allowances for estimated
product returns amounted to approximately $1.7 million
at December 31, 2006 and $2.3 million at December 31,
2005. We have not reduced and have no current plans to
reduce our prices for inventory currently held by distributors
or resellers. Accordingly, there were no reserves
required for price protection at December 31, 2006 and
December 31, 2005. We also record reductions to revenue
for customer programs and incentive offerings including
volume-based incentives, at the time the sale is recorded.
If market conditions were to decline, we could take actions
to increase our customer incentive offerings, which could
result in an incremental reduction to our revenue at the time
the incentive is offered.
Stock-Based Compensation
We adopted the provisions of Statement of Financial
Accounting Standards, or SFAS, No. 123R, Share-Based
Payment on January 1, 2006, the effective date for such
adoption . Prior to January 1, 2006, we accounted for our
stock-based compensation plans under the recognition
and measurement provisions of Accounting Principles
Board (“APB”) Opinion No. 25, Accounting for Stock
Issued to Employees , and related Interpretations, as
permitted by SFAS No. 123, Accounting for Stock-Based
Compensation . We did not recognize compensation cost
related to stock options granted to our employees and
non-employee directors that had an exercise price equal
to or above the market value of the underlying common
stock on the date of grant in our consolidated statement of
income prior to January 1, 2006. We elected to adopt SFAS
No. 123R using the modified-prospective method, under
which compensation cost, based on the requirements of
SFAS No. 123R, is recognized beginning with the effective
date for all stock-based awards granted to employees after
the effective date and prior to the effective date that remain
unvested as of the effective date. In addition, under the
modified-prospective method prior periods are not revised
for comparative purposes. Under the fair value recognition
provisions of SFAS No. 123R, stock-based compensation
cost is measured at the grant date based on the fair value
of the award and is recognized as expense on a straight-
line basis over the requisite service period, which is the
vesting period.
We currently use the Black-Scholes option pricing model
to determine the fair value of stock options and employee
stock purchase plan shares. The determination of the fair
value of stock-based payment awards on the date of grant
using an option-pricing model is affected by our stock price
as well as assumptions regarding a number of complex
and subjective variables. These variables include our
expected stock price volatility over the term of the awards,
the expected term of the award, the risk-free interest rate
and any expected dividends.
For purposes of determining the expected volatility factor,
we considered the implied volatility in two-year market-
traded options on our common stock based on third
party volatility quotes in accordance with the provisions of
Staff Accounting Bulletin, or SAB, No. 107. Our decision
to use implied volatility was based upon the availability
of actively traded options on our common stock and our
assessment that implied volatility is more representative
of future stock price trends than historical volatility. The
expected term of our options is based on historical and
projected employee exercise patterns. We also analyzed
our historical pattern of option exercises based on certain
demographic characteristics and we determined that
there were no meaningful differences in option exercise
activity based on the demographic characteristic. The
approximate risk free interest rate is based on the implied
yield available on U.S. Treasury zero-coupon issues with
remaining terms equivalent to the expected term on our
options. We do not intend to pay dividends on our common
stock in the foreseeable future and, accordingly, we used
a dividend yield of zero in the option pricing model. We
are required to estimate forfeitures at the time of grant
and revise those estimates in subsequent periods if actual
forfeitures differ from those estimates. We use historical
data to estimate pre-vesting option forfeitures and record