Citrix 2007 Annual Report Download - page 46

return rates for both specific products and distributors, estimated distributor inventory levels by product, the
impact of any new product releases and projected economic conditions. Actual product returns for stock
balancing and price protection provisions incurred are, however, dependent upon future events, including the
amount of stock balancing activity by our distributors and the level of distributor inventories at the time of any
price adjustments. We continually monitor the factors that influence the pricing of our products and distributor
inventory levels and make adjustments to these provisions 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, 2007 and 2006. 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, 2007 and December 31, 2006. 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 over the requisite service or performance period, which is the
vesting period.
We currently use the Black-Scholes option pricing model to determine the fair value of stock options. 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 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 demographic characteristics. 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
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