iRobot 2005 Annual Report Download - page 44

the date of grant. We incur stock-based compensation expense as we amortize the deferred stock-based
compensation amounts over the related vesting periods, up to five years. In addition, we have awarded options
to non-employees to purchase our common stock. Stock-based compensation expenses related to non-
employees are measured on a fair-value basis using the Black-Scholes valuation model on the date of grant
and amortized over the applicable vesting period.
Deferred stock-based compensation based on outstanding stock options at December 31, 2005 is
approximately $3.0 million. In addition, we expect to record aggregate amortization of stock-based compensa-
tion expense of approximately $0.7 million, $0.7 million, $0.7 million, $0.7 million and $0.2 million for fiscal
years 2006, 2007, 2008, 2009 and 2010, respectively, from these outstanding options, subject to continued
vesting of options.
As further described in Accounting for Stock-Based Awards, we currently anticipate that the adoption of
SFAS No. 123R will result in approximately $3.0 million of additional stock compensation expense in fiscal
2006.
For the fiscal year ended December 31, 2005 and 2004, stock-based compensation expense was
$0.4 million and zero dollars, or 0.3% and zero percent of total revenue, respectively.
Fiscal Periods
Historically, our fiscal year ended on December 31 and our fiscal quarters ended on March 31, June 30,
September 30 and December 31. Reference to fiscal 2004, for example, refers to the fiscal year ended
December 31, 2004. Beginning in fiscal 2005, we operate and report using a 52-53 week fiscal year ending on
the Saturday closest to December 31. Accordingly, each of our fiscal quarters ends on the Saturday that falls
closest to the last day of the third calendar month of the quarter.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these consolidated financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and
expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our actual
results may differ from these estimates.
We believe that of our significant accounting policies, which are described in the notes to our
consolidated financial statements, the following accounting policies involve a greater degree of judgment and
complexity. Accordingly, we believe that the following accounting policies are the most critical to aid in fully
understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition
We recognize revenue from sales of consumer products under the terms of the customer agreement upon
transfer of title to the customer, provided the price is fixed or determinable, collection is determined to be
probable and no significant obligations remain. Sales to resellers are subject to agreements allowing for limited
rights of return for defective products only, rebates and price protection. We have historically not taken
product returns except for defective products. Accordingly, we reduce revenue for our estimates of liabilities
for these rights at the time the related sale is recorded. We establish a provision for sales returns for products
sold by resellers directly or through our distributors based on historical return experience. We have aggregated
and analyzed historical returns from resellers and end users which form the basis of our estimate of future
sales returns by resellers or end users. In accordance with Statement of Financial Accounting Standards
No. 48 ""Revenue Recognition When Right of Return Exists,'' the provision for these estimated returns is
recorded as a reduction of revenue at the time that the related revenue is recorded. If actual returns from
retailers differ significantly from our estimates, such differences could have a material impact on our results of
operations for the period in which the actual returns become known. Our returns reserve is calculated as a
percentage of gross consumer product revenue. A one percentage point increase or decrease in our actual
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