THQ 2008 Annual Report Download - page 38

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Stock-based compensation. We adopted SFAS No. 123(R) ‘‘Share-Based Payment’’ (‘‘FAS 123R’’) in our
first quarter of fiscal 2007 and accordingly, we now record stock-based compensation expense for all of our
stock-based awards. The adoption of this accounting pronouncement had a material impact on our
consolidated statement of operations and our cash flows from operating and financing activities for fiscal
2007. See ‘‘Note 14—Stock-based Compensation’’ in the notes to the consolidated financial statements.
Under FAS 123R, we estimate the fair value of stock options granted using the Black-Scholes option
pricing model. The fair value for awards that are expected to vest is then amortized on a straight-line basis
over the requisite service period of the award, which is generally the option vesting term. The amount of
expense recognized represents the expense associated with the stock options we expect to ultimately vest
based upon an estimated rate of forfeitures; this rate of forfeitures is updated as necessary and any
adjustments needed to recognize the fair value of options that actually vest or are forfeited are recorded.
The Black-Scholes option pricing model, used to estimate the fair value of an award, requires the input of
subjective assumptions, including the expected volatility of our common stock and an option’s expected
life. As a result, the financial statements include amounts that are based upon our best estimates and
judgments relating to the expenses recognized for stock-based compensation. We adopted FAS 123R under
the modified prospective transition method wherein no prior period financial statement information was
affected. All prior period financial statements include stock-based compensation accounted for under
Accounting Principles Board Opinion (‘‘APB’’) No. 25, ‘‘Accounting for Stock Issued to Employees’’
(‘‘APB 25’’) and the disclosure only provisions of SFAS No. 123, ‘‘Accounting for Stock-Based
Compensation,’’ as amended (‘‘FAS 123’’). The financial statements for fiscal 2008 and 2007, include
stock-based compensation accounted for under FAS 123R. There were no material differences in valuation
methodologies or assumptions compared to those that were used in estimating the fair value of stock
options under the disclosure only provisions of FAS 123.
The following table sets forth the amount of stock-based compensation expense recognized in fiscal 2008,
2007 and 2006 (in thousands):
Year Ended March 31,
2008 2007 2006
Cost of sales—software amortization and royalties ..... $ 6,800 $ 2,087 $ —
Product development .......................... 4,773 3,364 926
Selling and marketing ......................... 2,654 2,817 981
General and administrative ..................... 8,444 10,704 1,515
Total stock-based compensation expense .......... $22,671 $18,972 $3,422
Income taxes. As part of the process of preparing our consolidated financial statements, we are required
to estimate our income taxes in each of the jurisdictions in which we operate. This process involves:
(i) estimating our current tax exposure in each jurisdiction including the impact, if any, of changes or
interpretations to applicable tax laws and regulations, (ii) estimating additional taxes resulting from tax
examinations and (iii) making judgments regarding the recoverability of deferred tax assets. To the extent
recovery of deferred tax assets is not likely based on our estimates of future taxable income in each
jurisdiction, a valuation allowance is established.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax
regulations. We recognize liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions
based on our estimate of whether, and the extent to which, additional taxes will be due. Our estimate for
the potential outcome for any uncertain tax issue, including our claims for research and development
income tax credits, requires judgment. We believe we have adequately provided for any reasonably
foreseeable outcome related to these matters. However, our future results may include favorable or
unfavorable adjustments to our estimated tax liabilities in the period in which they are resolved or when
statutes of limitation on potential assessments expire.
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