Salesforce.com 2012 Annual Report Download - page 45

Stock-Based Awards. 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 generally four years or one year for the
Employee Stock Purchase Plan (“ESPP”). The fair value of each award is estimated on the date of grant using the
Black-Scholes option pricing model. The estimated life for the stock options is based on an actual analysis of
expected life. The estimated life for the ESPP is based on the two purchase periods within the offering period.
The risk free interest rate is based on the rate for a U.S. government security with the same estimated life at the
time of the option grant and the stock purchase rights.
We estimate the future stock price volatility considering both our observed option-implied volatilities and
our historical volatility calculations. We believe this is the best estimate of the expected volatility over the
expected life of our stock options and stock purchase rights.
We recognized stock-based expense of $229.3 million during fiscal 2012. The requirement to expense
stock-based awards will continue to materially reduce our reported results of operations. As of January 31, 2012,
we had an aggregate of $820.6 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: $296.5 million during fiscal 2013; $256.4 million during fiscal 2014; $196.1
million during fiscal 2015 and $71.6 million during fiscal 2016. These amounts reflect only outstanding stock
awards as of January 31, 2012 and assume no forfeiture activity. We expect to continue to issue stock-based
awards to our employees in future periods, which will increase the stock compensation amortization in such
future periods.
We recognize as an operating expense the payroll and social tax costs, as applicable by jurisdiction, when stock
options are exercised. The impact of stock-based expense 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. Additionally, we are required to
use an option-pricing model to determine the fair value of stock-based 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.
As of January 31, 2012, there were 5.0 million restricted stock awards and units outstanding. We plan to
continue awarding restricted stock to our employees in the future. The restricted stock, which upon vesting
entitles the holder to one share of common stock for each restricted stock, has an exercise price of $0.001 per
share, which is equal to the par value of our common stock, and vests over four years. The fair value of the
restricted stock is based on our closing stock price on the date of grant, and compensation expense, net of
estimated forfeitures, is recognized on a straight-line basis over the vesting period.
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, 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 as a result of acquisitions, compensation, the
valuation of deferred tax assets and liabilities and changes in tax laws and accounting principles.
Our tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. We
recognize the tax benefit of an uncertain tax position only if it is more likely than not that the position is
sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is
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