XM Radio 2013 Annual Report Download - page 102

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollar amounts in thousands, unless otherwise stated)
Subscriber Acquisition Costs
Subscriber acquisition costs consist of costs incurred to acquire new subscribers and include hardware
subsidies paid to radio manufacturers, distributors and automakers, including subsidies paid to automakers who
include a satellite radio and a prepaid subscription to our service in the sale or lease price of a new vehicle;
subsidies paid for chip sets and certain other components used in manufacturing radios; device royalties for
certain radios; commissions paid to automakers as incentives to purchase, install and activate radios; product
warranty obligations; freight; and provisions for inventory allowance. Subscriber acquisition costs do not include
advertising, loyalty payments to distributors and dealers of radios and revenue share payments to automakers and
retailers of radios.
Subsidies paid to radio manufacturers and automakers are expensed upon installation, shipment, receipt of
product or activation and are included in Subscriber acquisition costs because we are responsible for providing
the service to the customers. 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, historical experience, 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,
2013, 2012 and 2011, we recorded research and development costs of $50,564, $42,605 and $48,574,
respectively. These costs are reported as a component of Engineering, design and development expense in our
consolidated statements of comprehensive income.
Share-Based Compensation
We account for equity instruments granted to employees in accordance with ASC 718, Compensation —
Stock Compensation. ASC 718 requires all share-based compensation payments to be recognized in the financial
statements based on fair value. ASC 718 requires forfeitures to be estimated at the time of grant and revised in
subsequent periods if actual forfeitures differ from initial estimates. We use the Black-Scholes-Merton option-
pricing model to value stock option awards and have elected to treat awards with graded vesting as a single
award. Share-based compensation expense is recognized ratably over the requisite service period, which is
generally the vesting period, net of forfeitures. We measure restricted stock awards and units using the fair
market value of the restricted shares of common stock on the day the award is granted.
Fair value as determined using the Black-Scholes-Merton model varies based on assumptions used for the
expected life, expected stock price volatility and risk-free interest rates. In 2013, 2012 and 2011, we estimated
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