Netgear 2013 Annual Report Download - page 70

Table of Contents NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 treatment for tax versus accounting for 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.
In the ordinary course of business there is inherent uncertainty in assessing the Company's income tax positions. The Company assesses its tax
positions and records benefits for all years subject to examination based on management's evaluation of the facts, circumstances and information
available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company records the
largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full
knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax
benefit has been recorded in the financial statements. Where applicable, associated interest and penalties have also been recognized as a component of
income tax expense.
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
The Company measures stock-
based compensation at the grant date based on the fair value of the award. The fair value of stock options is
estimated using the Black-Scholes option pricing model. Estimated compensation cost relating to restricted stock units (“RSUs”)
is based on the closing
fair market value of the Company’s common stock on the date of grant. The fair value of Employee Stock Purchase Plan (“ESPP”)
is based on the 15%
discount at purchase, since the price of the shares is determined at the purchase date.
The compensation expense for equity awards is reduced by an estimate for forfeitures and is recognized over the vesting period of the award under
a graded vesting method. In addition, the Company will recognize an excess benefit from stock-
based compensation in equity based on the difference
between tax expense computed with consideration of the windfall deduction and without consideration of the windfall deduction. In addition, the
Company accounts for the indirect effects of stock-
based compensation on the research tax credit and the foreign tax credit in the income statement. See
Note 11,
Employee Benefit Plans , of the Notes to Consolidated Financial Statements for a further discussion on stock-based compensation.
Comprehensive income
Comprehensive income consists of net income and other gains and losses affecting stockholder's equity that the Company excluded from net
income, including gains and losses related to fair value of short-
term investments and the effective portion of cash flow hedges that were outstanding as
of the end of the year.
Foreign currency translation
The Company's functional currency is the U.S. dollar for all of its international subsidiaries. Foreign currency transactions of international
subsidiaries are re-measured into U.S. dollars at the end-of-
period exchange rates for monetary assets and liabilities, and historical exchange rates for
non-monetary assets. Expenses are re-measured at average exchange rates in effect during each period, except for expenses related to non-
monetary
assets, which are re-measured at historical exchange rates. Revenue is re-
measured at average exchange rates in effect during each period. Gains and
losses arising from foreign currency transactions are included in total comprehensive income and were a net loss of $1.6 million
for the year ended
December 31, 2013 , a net gain of $0.2 million for the year ended December 31, 2012 and a net gain of $0.1 million for the year ended
December 31,
2011 .
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