Stamps.com 2014 Annual Report Download - page 48

Contingent Consideration
Under Financial Accounting Standards Board (“FASB”) ASC Topic No. 805 Business Combination (“ASC 805”), we are required to re-
measure
the fair value of the contingent consideration relating to our acquisition of ShipStation at each reporting period. The fair value of the contingent
consideration was approximately $25 million as of December 31, 2014. The fair value of the contingent consideration was determined based on
a probability weighted method, which incorporates management’s forecasts of financial measures and the likelihood of the financial measure
targets being achieved using a series of options that replicate the pay-off structure of the earn-out, and the value of each of these options was
determined using the Black-Scholes-Merton option pricing framework. Increases or decreases in the fair value of the contingent consideration
obligations can result from changes in the assumed timing and amount of revenue and expense estimates, changes in the probability of payment
scenarios, changes in stock values, as well as changes in capital market conditions, which impact the discount rate used in the fair valuation.
Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent
reporting period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions described above, can
materially impact the amount of contingent consideration expense we record in any given reporting period. See Note 3 – “Acquisitions” on our
Notes to Consolidated Financial Statements for further discussion of our contingent consideration relating to ShipStation.
Contingencies and Litigation
We are subject to various routine litigation matters as a claimant and a defendant. We record any amounts recovered in these matters when
received. We record liabilities for claims against us when the loss is both probable and estimable. Amounts recorded are based on reviews by
outside counsel, in-house counsel and management. Actual results could differ from estimates.
Promotional Expense
New mailing and shipping customers are typically offered promotional items that are redeemed using coupons that are qualified for redemption
after a customer is successfully billed beyond an initial trial period. We account for our promotional expense in accordance with Accounting
Standard Codification (“ASC”) 605-50-25, “Recognition – Vendor’s Accounting for Consideration Given to a Customer”, by recognizing a
liability for promotional expense based on estimated amounts that will be claimed by customers unless the liability for promotional expense
cannot be reasonable and reliably estimated. This includes free postage and a free digital scale and is expensed in the period in which a customer
qualifies using estimated redemption rates based on historical data. We periodically review our historical redemption rates and adjust, if
necessary, our estimated redemption rates for future periods. Promotional expense, which is included in cost of service, is incurred as customers
qualify and thereby may not correlate directly with changes in revenue, as the revenue associated with the acquired customer is earned over the
customer’s lifetime.
Income Taxes
We account for income taxes in accordance with FASB ASC Topic No. 740, Income Taxes (“ASC 740”), which requires that deferred tax assets
and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and
liabilities. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the
net deferred tax assets will not be realized. We record a valuation allowance to reduce our gross deferred tax assets, which are primarily
comprised of U.S. Federal and State tax loss carry-forwards, to the amount that is more likely than not (a likelihood of more than 50 percent) to
be realized. In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income. We evaluate the
appropriateness of our deferred tax assets and related valuation allowance in accordance with ASC 740 based on all available positive and
negative evidence.
Based on our evaluation of these factors, we reduced our valuation allowances in 2014 and 2013. The portion credited to the income statement
was approximately $13.9 million and $9.7 million, respectively. As of December 31, 2014, we no longer have any valuation allowance against
our gross deferred tax assets as we believe we have met the more likely than not threshold that we will be able to utilize our tax loss carry-
forwards in the foreseeable future. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets
in the future, an adjustment to the deferred tax assets valuation allowance would be charged to earnings in the period in which we make such a
determination. Likewise, if we later determine that it is more likely than not that additional deferred tax assets would be realized, we would
reverse the applicable portion of the previously provided valuation allowance.
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