ServiceMagic 2014 Annual Report Download - page 55

Table of Contents
The Company accounts for income taxes under the liability method, and deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that the
deferred tax asset will not be realized. As of December 31, 2014, the balance of deferred tax liabilities, net, is $390.4 million. Actual income taxes
could vary from these estimates due to future changes in income tax law, state income tax apportionment or the outcome of any review of our tax
returns by the various tax authorities, as well as actual operating results of the Company that vary significantly from anticipated results.
Stock-Based Compensation
As disclosed in Note 12 to the consolidated financial statements, the Company estimated the fair value of stock options issued in 2014, 2013
and 2012 using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 1.5%, 1.0% and
0.6%, respectively, a dividend yield of 1.5%, 2.0% and 1.2%, respectively, volatility factors of 31%, 29% and 31%, respectively, based on the
historical stock price volatilities of IAC and a weighted average expected term of the stock options of 4.8 years, 6.2 years and 4.4 years,
respectively. For stock options, including unvested stock options assumed in acquisitions, the value of the stock option is measured at the grant date
(or acquisition date, if applicable) at fair value and expensed over the remaining vesting term. The impact on non-cash compensation expense for
the year ended December 31, 2014, assuming a 1% increase in the risk-free interest rate, a 10% increase in the volatility factor and a one year
increase in the weighted average expected term of the outstanding options would be an increase of $2.5 million, $11.9 million and $5.1 million,
respectively. The impact on non-cash compensation expense for the year ended December 31, 2014, assuming a 1% increase in the dividend yield
of the outstanding options, would be a decrease of $1.1 million. The Company also issues RSUs and performance-based RSUs. For RSUs issued,
the value of the instrument is measured at the grant date as the fair value of IAC common stock and expensed as non-cash compensation expense
over the vesting term. For performance-based RSUs issued, the value of the instrument is measured at the grant date as the fair value of IAC
common stock and expensed as non-cash compensation over the vesting term when the performance targets are considered probable of being
achieved.
Marketable Securities and Long-term Investments
At December 31, 2014, marketable securities consist of short-to-medium-
term debt securities issued by investment grade corporate issuers and
an equity security. Long-term investments include equity securities accounted for under the equity and cost methods and marketable equity
securities. The Company invests in marketable debt securities with active secondary or resale markets to ensure portfolio liquidity to fund current
operations or satisfy other cash requirements as needed. The Company also invests in marketable equity securities as part of its investment strategy.
Marketable securities are adjusted to fair value each quarter, and the unrealized gains and losses, net of tax, are included in accumulated other
comprehensive income as a separate component of shareholders' equity. The specific-identification method is used to determine the cost of
securities sold and the amount of unrealized gains and losses reclassified out of accumulated other comprehensive income into earnings. The
Company recognizes unrealized losses on marketable securities in net earnings when the losses are determined to be other-than-temporary.
Additionally, the Company evaluates each cost and equity method investment for indicators of impairment on a quarterly basis, and recognizes an
impairment loss if the decline in value is deemed to be other-than-temporary. Future events may result in reconsideration of the nature of losses as
other-than-temporary and market and other factors may cause the value of the Company's investments to decline.
The Company employs a methodology that considers available evidence in evaluating potential other-than-temporary impairments of its
investments. Investments are considered to be impaired when a decline in fair value below the amortized cost basis is determined to be other-than-
temporary. Such impairment evaluations include, but are not limited to: the length of time and extent to which fair value has been less than the cost
basis, the current business environment, including competition; going concern considerations such as financial condition, the rate at which the
investee utilizes cash and the investee's ability to obtain additional financing to achieve its business plan; the need for changes to the investee's
existing business model due to changing business and regulatory environments and its ability to successfully implement necessary changes; and
comparable valuations. During 2014 and 2013, the Company recognized impairment charges of $66.6 million and $5.0 million, respectively, related
to cost method investments and during 2012, the Company recorded an impairment charge of $8.7 million related to one of its long-
term marketable
equity securities. These charges are more fully described above in "Results of Operations for the Years Ended December 31, 2014, 2013 and 2012 -
Other (expense) income, net."
Recent Accounting Pronouncement
For a discussion of a recent accounting pronouncement, see Note 2 — Summary of Significant Accounting Policies in the notes to
consolidated financial statements.
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