Netgear 2006 Annual Report Download - page 54

Table of Contents
NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Shipping and handling costs associated with inbound freight are included in cost of revenue. In cases where the
Company gives a freight allowance to the customer for their own inbound freight costs, such costs are appropriately
recorded as a reduction in net revenue. Shipping and handling costs associated with outbound freight are included in
sales and marketing expenses and totaled $6.4 million, $6.7 million and $8.3 million in the years ended
December 31, 2004, 2005 and 2006 respectively.
Research and development
Costs incurred in the research and development of new products are charged to expense as incurred.
Advertising costs
Advertising costs are expensed as incurred. Total advertising and promotional expenses were $11.9 million,
$14.5 million and $15.3 million in the years ended December 31, 2004, 2005 and 2006, respectively.
Income taxes
The Company accounts for income taxes under an asset and liability approach. Under this method, income tax
expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax
assets and liabilities are recognized for the expected future tax consequences of temporary differences resulting from
different treatments for tax versus accounting of certain items, such as accruals and allowances not currently
deductible for tax purposes. These differences result in deferred tax assets and liabilities, which are included within
the consolidated balance sheet. The Company must then assess the likelihood that the Company’s deferred tax assets
will be recovered from future taxable income and to the extent the Company believes that recovery is not more likely
than not, the Company must establish a valuation allowance.
The Company assesses the probability of adverse outcomes from tax examinations regularly to determine the
adequacy of the Company’s income tax liability. If the Company ultimately determines that payment of these
amounts is unnecessary, the Company reverses the liability and recognizes a tax benefit during the period in which
the Company determines that the liability is no longer necessary. The Company records an additional charge in the
Company’s provision for taxes in the period in which the Company determines that the recorded tax liability is less
than the Company expects the ultimate assessment to be.
Computation of net income per share
Basic net income per share is computed by dividing net income by the weighted average number of common
shares outstanding for the period. Diluted net income per share reflects the additional dilution from potential
issuances of common stock, such as stock issuable pursuant to the exercise of stock options and awards. Potentially
dilutive shares are excluded from the computation of diluted net income per share when their effect is anti-dilutive.
Stock-based compensation
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123 (revised
2004), “Share-Based Payment” (“SFAS 123R”), using the modified prospective transition method and therefore has
not restated results for prior periods. Under this transition method, stock-based compensation expense for the year
ended December 31, 2006 includes compensation expense for all stock-based compensation awards granted prior to,
but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original
provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Stock-based
compensation expense for all stock-based compensation awards granted on or after January 1, 2006 is based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R. The valuation provisions of
SFAS 123R also apply to grants that are modified after January 1, 2006. The Company recognizes these
compensation costs on a straight-line basis over the requisite service period of the award, which is generally
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