Enom 2010 Annual Report Download - page 113

Table of Contents
Demand Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(In thousands, except per share amounts)
2. Summary of Significant Accounting Policies (Continued)
significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key
personnel, significant changes in the manner of the Company's use of the acquired assets or the strategy for the Company's overall business, significant
negative industry or economic trends or significant underperformance relative to expected historical or projected future results of operations.
The testing for a potential impairment of goodwill involves a two-step process. The first step is to identify whether a potential impairment exists by
comparing the estimated fair values of the Company's reporting units with their respective book values, including goodwill. If the estimated fair value of the
reporting unit exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the reporting
unit is less than book value, then the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss, if any. The
amount of the impairment loss is the excess of the carrying amount of the goodwill over its implied fair value. The estimate of implied fair value of goodwill
is primarily based on an estimate of the discounted cash flows expected to result from that reporting unit but may require valuations of certain internally
generated and unrecognized intangible assets such as the Company's software, technology, patents and trademarks. If the carrying amount of goodwill exceeds
the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
Operating Leases
For operating leases that include escalation clauses over the term of the lease, the Company recognizes rent expense on a straight-line basis and the
difference between expense and amounts paid are recorded as deferred rent in current and long-term liabilities.
Stock-Based Compensation
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
period, which is the vesting period, on a straight-line basis. The Company uses the Black-Scholes option pricing model to determine the fair value of stock
options that do not include market conditions. Stock-based awards are comprised principally of stock options and restricted stock purchase rights ("RSPR").
Some employee awards granted by the Company contain certain performance and/or market conditions. The Company recognizes compensation cost for
awards with performance conditions based upon the probability of that performance condition being met, net of an estimate of pre-vesting forfeitures. Awards
granted with performance and/or market conditions are amortized using the graded vesting method.
The effect of a market condition is reflected in the award's fair value on the grant date. The Company uses a Monte Carlo simulation model or binomial
lattice model to determine the grant date fair value of awards with market conditions. Compensation cost for an award that has a market condition is
recognized as the requisite service period is fulfilled, even if the market condition is never satisfied.
Stock-based awards issued to non-employees are accounted for at fair value determined using the Black-Scholes option-pricing model. Management
believes that the fair value of the stock options is
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