Medtronic 2015 Annual Report Download - page 117

Medtronic plc
Notes to Consolidated Financial Statements (Continued)
The following table provides the weighted average fair value of options granted to employees and the related assumptions used
in the Black-Scholes model:
Fiscal Year
2015 2014 2013
Weighted average fair value of options granted $ 25.39 $ 12.00 $ 7.42
Assumptions used:
Expected life (years)(a) 4.24 6.40 6.50
Risk-free interest rate(b) 0.99% 1.88% 0.94%
Volatility(c) 21.29% 25.20% 26.22%
Dividend yield(d) 1.66% 2.02% 2.64%
(a) Expected life: The Company analyzes historical employee stock option exercise and termination data to estimate the
expected life assumption. The Company calculates the expected life assumption using the midpoint scenario, which
combines historical exercise data with hypothetical exercise data, as the Company believes this data currently represents
the best estimate of the expected life of a new employee option. The Company also stratifies its employee population
into two groups based upon distinctive exercise behavior patterns.
(b) Risk-free interest rate: The rate is based on the grant date yield of a zero-coupon U.S. Treasury bond whose maturity
period equals the expected term of the option.
(c) Volatility: Expected volatility is based on a blend of historical volatility and an implied volatility of the Company’s
ordinary shares. Implied volatility is based on market traded options of the Company’s ordinary shares.
(d) Dividend yield: The dividend yield rate is calculated by dividing the Company’s annual dividend, based on the most
recent quarterly dividend rate, by the closing stock price on the grant date.
Stock-Based Compensation Expense Under the fair value recognition provisions of U.S. GAAP for accounting for stock-
based compensation, the Company measures stock-based compensation expense at the grant date based on the fair value of the
award and recognizes the compensation expense over the requisite service period, which is generally the vesting period.
The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are
ultimately expected to vest. The Company estimates pre-vesting forfeitures at the time of grant by analyzing historical data and
revises those estimates in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the total expense
recognized over the vesting period will equal the fair value of awards that actually vest.
Pursuant to the Transaction Agreement, unvested restricted stock units held by Covidien employees that were granted prior to
June 15, 2014 accelerated and became vested upon the close of the Covidien acquisition, whereby each share was converted in a
manner consistent with the Arrangement Consideration discussed in Note 2. The accelerated vesting and share conversion
constituted a modification under the authoritative guidance for accounting for stock compensation and resulted in $91 million of
incremental costs on the date of acquisition and is included in acquisition-related items.
Also pursuant to the Transaction Agreement, unvested performance share units held by Covidien employees accelerated and
vested upon the close of the Covidien acquisition based on performance achieved through January 15, 2015. The modification
made to the market-based condition of unvested performance share units as a result of the Covidien acquisition also constituted
a modification similar to the modification described above. As a result, the modification resulted in incremental compensation
cost of $72 million on the date of the acquisition and is included in acquisition-related items.
Additionally, pursuant to the Transaction Agreement, outstanding stock option awards held by Covidien employees upon
transaction close were converted into options to acquire the Company’s ordinary shares in a manner designed to preserve the
intrinsic value of such awards. In addition, pursuant to the Transaction Agreement, unvested restricted stock units granted on or
after June 15, 2014 which were held by Covidien employees upon close of the Covidien acquisition were converted into
restricted stock units of the Company in a manner designed to preserve the intrinsic value of such awards. The modifications
made to the restricted stock units granted on or after June 15, 2014 and all outstanding share options pursuant to the Transaction
Agreement that converted such awards constituted modifications under the authoritative guidance for accounting for stock
compensation. This guidance requires the Company to revalue the award upon the transaction close and allocate the revised fair
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