LifeLock 2013 Annual Report Download - page 57

fees are applied. The up-front non-refundable payments are recorded as deferred revenue and recognized as revenue monthly over the usage period. If an
enterprise customer does not meet its monthly minimum fee, we bill the negotiated monthly minimum fee and recognize revenue for that amount. Revenue from
projects in which we are engaged to deliver a report at the end of the analysis is recorded upon delivery and acceptance of the report.
We also sell our consumer services through strategic partners, which earn commissions for sales to individual members and entities. Because (i) we are
primarily responsible for fulfillment of the service obligation, (ii) we determine service specifications, and (iii) we have latitude in establishing prices for our
service agreements, we record all sales made through strategic pa rtners as revenue and the related commissions as a sales and marketing expense.
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We account for share-based compensation in accordance with the authoritative guidance on stock compensation. Under the fair value recognition
provisions of this guidance, share-based compensation is measured at the grant date based on the fair value of the award and is recognized as an expense, net
of estimated forfeitures, over the requisite service period, which is generally the vesting period of the a ward.
Share-based compensation expense for awards granted to employees is based on the grant date fair value, which we determine using the Black-Scholes
option pricing model. The grant date fair value is amortized on a straight-line basis over the requisite service period of the award to the extent such award is
probable of being earned. The requisite service period is generally the vesting period of the award.
Expense for share-based awards to non-employees is based on the fair value of the awards as they vest, which we determine using the Black-Scholes
option pricing model. The fair value of the unvested portion of the awards is re-measured each reporting period and is recognized over the expected service
period to the extent the award is probable of being earned. There is inherent uncertainty in these estimates and if different assumptions were used, the fair value
of the equity instruments could have been significantly different.
Prior to our IPO, our board of directors considered a number of objective and subjective factors to determine the fair market value of our common stock
at each meeting at which stock options were granted and approved.
Share-based compensation expenses are classified in the statement of operations based on the department to which the related employee reports. Our
share-based compensation is comprised principally from expenses from stock options and restricted stock unit awards and our employee stock purchase plan.
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Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value assigned to the individual assets acquired and
liabilities assumed. We do not amortize goodwill, but instead we are required to test goodwill for impairment at least annually and, if necessary, we would
record any impairment. We will perform an impairment test between scheduled annual tests if facts and circumstances indicate that it is more likely than not
that the fair value of a reporting unit that has goodwill is less than its carrying value.
We may first make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value to
determine whether it is necessary to perform the two-step goodwill impairment test. The qualitative impairment test includes considering various factors
including macroeconomic conditions, industry and market conditions, cost factors, a sustained share price or market capitalization decrease, and any
reporting unit specific events. If it is determined through the qualitative assessment that a reporting unit’s fair value is more likely than not greater than its
carrying value, the two-step impairment test is not required. If the qualitative assessment indicates it is more likely than not that a reporting unit’s fair value is
not greater than its carrying value, we must perform the two-step impairment test. We may also elect to proceed directly to the two-step impairment test without
considering such qualitative factors.
The first step in the two-step impairment test is a comparison of the fair value of a reporting unit with its carrying amount, including goodwill. We have
two operating segments, a consumer segment and an enterprise segment, which are the same as our two reporting segments. In accord ance with the authoritative
guidance over fair value measurements, we define the fair value of a reporting unit as the price that would be received to sell the unit as a whole in an orderly
transaction between market participants at the measurement date. We will primarily use the income approach methodology of valuation, which includes the
discounted cash flow method, and the market approach methodology of valuation, which considers values of comparable businesses to estimate the fair
values of our reporting units. We do not believe that a cost approach is relevant to measuring the fair values of our reporting units.
Significant management judgment will be required when estimating the fair value of our reporting units, including the forecasting of future operating
results, the discount rates and expected future growth rates that we use in the discounted cash flow method of valuation, and the selection of comparable
businesses that we use in the market approach. If the estimated fair value of the reporting unit exceeds the carrying value assigned to that unit, goodwill is not
impaired and no further analysis is required.
If the carrying value assigned to a reporting unit exceeds its estimated fair value in the first step, then we will be required to perform the second step of
the impairment test. In this step, we will assign the fair value of the reporting unit calculated in the first
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