Salesforce.com 2013 Annual Report Download - page 93

In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity
components. The carrying amount of the liability component was calculated by measuring the fair value of a
similar liability that does not have an associated convertible feature. The carrying amount of the equity
component representing the conversion option was determined by deducting the fair value of the liability
component from the par value of the Notes as a whole. The excess of the principal amount of the liability
component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the Notes.
The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the Note issuance, the Company allocated the total amount
incurred to the liability and equity components based on their relative values. Transaction costs attributable to the
liability component are being amortized to expense over the term of the Notes, and transaction costs attributable
to the equity component were netted with the equity component in temporary stockholders’ equity and
stockholders’ equity. Additionally, the Company recorded a deferred tax liability of $51.1 million in connection
with the Notes.
The Notes consisted of the following (in thousands):
As of January 31,
2013 2012
Liability component :
Principal .................................. $574,890 $574,890
Less: debt discount, net ....................... (53,612) (78,741)
Net carrying amount ..................... $521,278 $496,149
As of January 31, 2013, the remaining life of the Notes is approximately 2.0 years.
The following table sets forth total interest expense recognized related to the Notes prior to capitalization of
interest (in thousands):
Fiscal Year Ended
January 31,
2013 2012
Contractual interest expense ....................... $ 4,313 $ 4,312
Amortization of debt issuance costs ................. 1,324 1,324
Amortization of debt discount ...................... 25,131 23,720
$30,768 $29,356
Effective interest rate of the liability component ....... 5.86% 5.86%
Interest Expense
Interest expense consists of interest on the Company’s capital lease commitments and the Notes, net of
amounts capitalized. In accounting for the Notes at the time of issuance in January 2010, the carrying amount of
the liability component was calculated by measuring the fair value of a similar liability that did not have an
associated convertible feature. The excess of the principal amount of the liability component over its carrying
amount is amortized, using an effective interest rate of 5.86%, to interest expense over the term of the Notes.
Interest costs of $1.6 million, $14.1 million and $3.7 million related to the buildings and improvements and
$0.8 million, $0.5 million and $0.3 million related to the Company’s capitalized internal-use software
development efforts were capitalized in fiscal 2013, 2012 and 2011, respectively. During the first quarter of
fiscal 2013, the Company suspended pre-construction activity, which includes capitalized interest costs, on the
undeveloped real estate in San Francisco, California causing capitalization of interest costs to cease.
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