Salesforce.com 2006 Annual Report Download - page 43

Table of Contents
Accounting for Stock-Based Awards. Effective February 1, 2006, we adopted the fair value recognition provisions of SFAS 123R, using the modified
prospective transition method and therefore we have not restated results for prior periods. Prior to February 1, 2006, we accounted for share-based
compensation under APB 25.
SFAS 123R requires all employee share-based payments, including grants of employee stock options, be recognized as expense in the statement of
operations based on their fair values and vesting periods. We recognize the fair value of our stock awards on a straight-line basis over the requisite service
period of the award, which is the vesting term of four years.
We recognized stock-based expense of $39.2 million during fiscal 2007. The requirement to expense stock-based awards will continue to materially
reduce our reported results of operations. As of January 31, 2007, we had an aggregate of $152.4 million of stock compensation remaining to be amortized to
expense over the remaining requisite service period of the underlying awards. We currently expect this stock compensation balance to be amortized as
follows: $53.5 million during fiscal 2008; $47.3 million during fiscal 2009; $36.5 million during fiscal 2010; and $15.1 million during fiscal 2011. The
expected amortization reflects only outstanding stock awards as of January 31, 2007 and assumes no forfeiture activity. We expect to continue to issue share-
based awards to our employees in future periods.
The impact of SFAS 123R in the future is dependent upon, among other things, the timing of when we hire additional employees, the effect of long-
term incentive strategies involving stock awards in order to continue to attract and retain employees, the total number of stock awards granted, the fair value
of the stock awards at the time of grant, changes in estimated forfeiture assumption rates and the tax benefit that we may or may not receive from stock-based
expenses. Additionally, the application of SFAS 123R requires the use of an option-pricing model to determine the fair value of stock option awards. This
determination of fair value is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These
variables include, but are not limited to, our expected stock price volatility over the term of the awards.
During fiscal 2007, we awarded 876,303 restricted stock units to our employees. We plan to continue awarding restricted stock units in the future. The
restricted stock units, which upon vesting entitles the holder to one share of common stock for each restricted stock unit, have an exercise price of $0.001 per
share, which is equal to the par value of our common stock, and vest over 4 years. During fiscal 2007, the fair value of the restricted units is based on our
closing stock price on the date of grant, which ranged from $29.35 to $39.35 per share, and compensation expense, net of estimated forfeitures, is recognized
on a straight-line basis over the vesting period.
Accounting for Income Taxes. We account for income taxes using the liability method, which requires the recognition of deferred tax assets or liabilities
for the tax-effected temporary differences between the financial reporting and tax bases of our assets and liabilities and for net operating loss and tax credit
carryforwards. The tax expense or benefit for unusual items, prior year tax exposure items or certain adjustments to the valuation allowance are treated as
discrete items in the interim period in which the events occur.
Our effective tax rate could be adversely affected by changes in the mix of earnings and losses in countries with differing statutory tax rates, certain
non-deductible expenses arising from SFAS 123R and the valuation of deferred tax assets and liabilities.
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