Salesforce.com 2013 Annual Report Download - page 76

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The fair value of each stock option grant and stock purchase right granted under the ESPP was estimated on
the date of grant using the Black-Scholes option pricing model with the following assumptions and fair value per
share:
Fiscal Year Ended January 31,
Stock Options 2013 2012 2011
Volatility ..................... 43-51% 47-51% 45-50%
Estimated life ................. 3.7years 3.7 years 3.7 - 3.8 years
Risk-free interest rate ........... 0.43 - 0.77% 0.68 - 1.77% 0.98 - 2.10%
Dividend yield ................. 0 0 0
Weighted-average fair value per
share of grants ............... $ 51.77 $ 49.14 $ 48.83
Fiscal Year Ended January 31,
ESPP 2013 2012 2011
Volatility ..................... 39-46% 50-53% n/a
Estimated life ................. 0.75 years 0.75 years n/a
Risk-free interest rate ........... 0.03 - 0.22% 0.95 - 1.08% n/a
Dividend yield ................. 0 0 n/a
Weighted-average fair value per
share of grants ............... $ 45.55 $ 34.34 n/a
The Company estimated its future stock price volatility considering both its observed option-implied
volatilities and its historical volatility calculations. Management believes this is the best estimate of the expected
volatility over the expected life of its stock options and stock purchase rights.
The estimated life for the stock options was based on an actual analysis of expected life. The estimated life
for the ESPP was based on the two purchase periods within each 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.
There was no stock-based expense related to the ESPP in fiscal 2011 because the Company did not
commence the ESPP until December 2011.
Advertising Expenses
Advertising is expensed as incurred. Advertising expense was $110.7 million, $80.3 million and
$61.4 million for fiscal 2013, 2012 and 2011, respectively.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on temporary differences between the financial statement
and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are
expected to reverse. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the
consolidated statement of operations in the period that includes the enactment date. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts more likely than not expected to be
realized.
The Company’s tax positions are subject to income tax audits by multiple tax jurisdictions throughout the
world. The Company recognizes 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 measured as the largest amount of benefit which is greater than 50 percent likely to be
realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties
related to unrecognized tax benefits in the income tax provision.
72