XM Radio 2010 Annual Report Download - page 101

Subsidies paid to radio manufacturers and automakers are expensed upon installation, shipment, receipt of
product or activation. Commissions paid to retailers and automakers are expensed upon either the sale or activation
of radios. Chip sets that are shipped to radio manufacturers and held on consignment are recorded as inventory and
expensed as Subscriber acquisition costs when placed into production by radio manufacturers. Costs for chip sets
not held on consignment are expensed as Subscriber acquisition costs when the automaker confirms receipt.
We record product warranty obligations in accordance with ASC 460, Guarantees, which requires a guarantor
to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the
guarantee. We warrant that certain products sold through our retail and direct to consumer distribution channels will
perform in all material respects in accordance with specifications in effect at the time of the purchase of the products
by the customer. The product warranty period on our products is 90 days from the purchase date for repair or
replacement of components and/or products that contain defects of material or workmanship. We record a liability
for costs that we expect to incur under our warranty obligations when the product is shipped from the manufacturer.
Factors affecting the warranty liability include the number of units sold and historical and anticipated rates of claims
and costs per claim. We periodically assess the adequacy of our warranty liability based on changes in these factors.
Research & Development Costs
Research and development costs are expensed as incurred and primarily include the cost of new product
development, chip set design, software development and engineering. During the years ended December 31, 2010,
2009 and 2008, we recorded research and development costs of $40,043, $38,852 and $41,362, respectively. These
costs are reported as a component of Engineering, design and development expense in our consolidated statements
of operations.
Income Taxes
Deferred income taxes are recognized for the tax consequences related to temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes at
each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. A valuation allowance is recognized when, based on the weight of all
available evidence, it is considered more likely than not that all, or some portion, of the deferred tax assets will not
be realized. Income tax expense is the sum of current income tax plus the change in deferred tax assets and
liabilities.
ASC 740, Income Taxes, requires a company to first determine whether it is more-likely-than-not that a tax
position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will
examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-
than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent
likely to be realized upon effective settlement with a taxing authority. Changes in recognition or measurement are
reflected in the period in which the change in judgment occurs. We record interest and penalties related to uncertain
tax positions in income tax expense, net of amounts capitalized, in our consolidated statement of operations.
We report revenues net of any tax assessed by a governmental authority that is both imposed on, and concurrent
with, a specific revenue-producing transaction between a seller and a customer in our consolidated statements of
operations.
Earnings per Share (“EPS”)
Basic net income (loss) per common share is calculated using the weighted average common shares
outstanding during each reporting period. Diluted net income (loss) per common share adjusts the weighted
average common shares outstanding for the potential dilution that could occur if common stock equivalents
(convertible debt and preferred stock, warrants, stock options, restricted stock and restricted stock units) were
F-13
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)