EMC 2004 Annual Report Download - page 34

Table of Contents
The provisions of Statement No. 151 should be applied prospectively. The adoption of FAS No. 151 is not expected to have a material impact on our financial
position or results of operations.
In December 2004, the FASB issued FAS No. 123R, "Share-Based Payment." The statement replaces FAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The
adoption of the statement will result in the expensing of the fair value of stock options granted to employees in the basic financial statements. Previously, we
elected to only disclose the impact of expensing the fair value of stock options in the notes to the financial statements. See "Accounting for Stock-Based
Compensation" in Note A to the financial statements. The statement is effective for the quarters commencing after June 15, 2005.
The statement applies to new equity awards and to equity awards modified, repurchased, or canceled after the effective date. Additionally, compensation
cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of the effective date shall be recognized as the
requisite service is rendered on or after the effective date. The compensation cost for that portion of awards shall be based on the grant-date fair value of those
awards as calculated from the pro forma disclosures under Statement No. 123. Changes to the grant-date fair value of equity awards granted before the
effective date of this statement are precluded. The compensation cost for those earlier awards shall be attributed to periods beginning on or after the effective
date of this statement using the attribution method that was used under Statement No. 123, except that the method of recognizing forfeitures only as they
occur shall not be continued. Any unearned or deferred compensation (contra-equity accounts) related to those earlier awards shall be eliminated against the
appropriate equity accounts. Additionally, common stock purchased pursuant to stock options granted under our employee stock purchase plan will be
expensed based upon the fair market value of the stock option.
The statement also allows for a modified version of retrospective application to periods before the effective date. Modified retrospective application may
be applied either (a) to all prior years for which Statement No. 123 was effective or (b) only to prior interim periods in the year of initial adoption. An entity
that chooses to apply the modified retrospective method to all prior years for which Statement No. 123 was effective shall adjust financial statements for prior
periods to give effect to the fair-value-based method of accounting for awards granted, modified, or settled in cash in fiscal years beginning after
December 15, 1994, on a basis consistent with the pro forma disclosures required for those periods by Statement No. 123. Accordingly, compensation cost
and the related tax effects will be recognized in those financial statements as though they had been accounted for under Statement No. 123. Changes to
amounts as originally measured on a pro forma basis are precluded.
The adoption of FAS No. 123R will have a material impact on our results of operations, increasing cost of sales, SG&A expenses and R&D expenses. The
future results will be impacted by the number and value of additional stock option grants as well as the value of existing unvested stock options. We have
utilized the Black-Scholes option pricing model to determine the value of our stock options. We estimated volatility to be 46.4%, 55.0% and 55.0% in 2004,
2003 and 2002, respectively. The decline in volatility in 2004 compared to the prior two years was due to our recent volatility experience. We estimated the
expected life of stock options that were issued to be 4.2 years, 5.0 years and 5.0 years in 2004, 2003 and 2002, respectively. The decline in the expected life in
2004 compared to the prior two years was due to a change in current exercise patterns. For more information on the impact of expensing stock options on the
three years ended December 31, 2004, 2003, and 2002, see "Accounting for Stock-Based Compensation" in Note A to the financial statements.
In December 2004, the FASB issued FAS No. 153, "Exchange of Nonmonetary Assets", which is an amendment to APB Opinion No. 29. The guidance in
APB Opinion No. 29, "Accounting for Nonmonetary Transactions", is based on the principle that exchanges of nonmonetary assets should be measured based
on the fair value of the assets exchanged. The guidance in that opinion, however, included certain exceptions to that principle. This statement amends APB
Opinion No. 29 to eliminate the 31