Etsy 2015 Annual Report Download - page 66

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We lease office space and certain computer equipment in multiple locations under non-cancelable lease agreements. The leases are reviewed for classification
as operating or capital leases. For operating leases, rent is recognized on a straight-line basis over the lease period. For capital leases, we record the leased
asset with a corresponding liability. Payments are recorded as reductions to the liability with an appropriate interest charge recorded based on their
outstanding remaining liability.
We consider the nature of the renovations and our involvement during the construction period of newly-leased office space to determine if we are considered
to be the owner of the construction project during the construction period. If we determine that we are the owner of the construction project, we are required
to capitalize the fair value of the building as well as the construction costs incurred on our consolidated balance sheet along with a corresponding financing
liability (“build-to-suit accounting”). Upon occupancy for build-to-suit leases, we assess whether the circumstances qualify for sales recognition under the
sale-leaseback accounting guidance. If the lease meets the sale-leaseback criteria, we will remove the asset and related financial obligation from the balance
sheet and treat the building lease as an operating lease. If upon completion of construction, the project does not meet the “sale-leaseback” criteria, the leased
property will be treated as a capital lease for financial reporting purposes.
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We account for income tax benefit (provision) based on (loss) income before income taxes, and we use the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. We assess the need for a
valuation allowance on a quarterly basis to reduce deferred tax assets to the amounts we expect to be realized.
We account for uncertainty in income taxes using a recognition threshold and a measurement attribute for the financial statement recognition and
measurement of tax positions taken or expected to be taken in a tax return. For benefits to be recognized, a tax position must be more likely than not to be
sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50%
likelihood of being realized upon ultimate audit settlement. We have an unrecognized tax benefit of $0.4 million and $22.2 million at December 31, 2014
and 2015, respectively.
We recognize interest and penalties, if any, associated with tax matters as part of the income tax provision and include accrued interest and penalties with the
related tax liability in our consolidated balance sheet.
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Stock options and restricted stock units ("RSUs") are awarded to employees, members of our board of directors and non-employee third parties are measured
at fair value at each grant date. Stock options generally vest over a four-year period with 25% of the shares underlying the options vesting on the date that is
12 months after the vesting commencement date and thereafter 1/48th of the shares vesting each month, subject to continued service with us through each
vesting date. RSUs generally vest 25% after the first year following the vesting commencement date, which is the first day of the fiscal quarter closest to the
date of grant, and then vest ratably each quarter over the remaining 12-quarter period contingent on continued employment with us on each vesting date.
Stock-based compensation cost is measured on the grant date, based on the estimated fair value of the award using a Black-Scholes pricing model and
recognized as an expense over the employee’s or director’s requisite service period on a straight-line basis. The fair value of RSUs is determined based on the
closing price of our common stock on Nasdaq on the grant date. We expect to continue to grant stock options and RSUs in the future, and, to the extent that
we do, our stock-based compensation expense recognized in future periods will likely increase.
We account for stock-based compensation arrangements with non-employees using a fair value approach. The fair value of these options is measured using
the Black-Scholes option-pricing model reflecting the same assumptions as applied to employee options in each of the reported periods, other than the
expected life, which is assumed to be the contractual life of the option. The compensation costs of these arrangements are subject to remeasurement over the
vesting terms as earned.
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