iRobot 2005 Annual Report Download - page 46

2005. We recorded $0.4 million of aggregate amortization of stock-based compensation expense in the fiscal
year ended December 31, 2005 and expect to record aggregate amortization of stock-based compensation
expense of $0.7 million, $0.7 million, $0.7 million, $0.7 million and $0.2 million for 2006, 2007, 2008, 2009
and 2010, respectively.
On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R eliminates
the alternative of applying the intrinsic value measurement provisions of Opinion 25 to stock compensation
awards issued to employees. Instead, SFAS 123R requires companies to measure the cost of employee
services received in exchange for an award of equity instruments based on the grant-date fair value of the
award. That cost must be recognized over the period during which an employee is required to provide services
in exchange for the award, known as the requisite service period, which is usually the vesting period.
We have adopted Statement No. 123R effective January 1, 2006 using the ""modified-prospective
method.'' Under this method, awards that are granted, modified, or settled after the date of adoption are
measured and accounted for in accordance with SFAS No. 123R. Unvested equity-classified awards that were
granted prior to the effective date of SFAS 123R will continue to be accounted for in accordance with
SFAS No. 123, except that amounts must be recognized in the financial statements. We expect to apply the
Black-Scholes valuation model in determining the fair value of share-based payments to employees, which will
then be amortized on a straight-line basis. Based on our preliminary determination we expect that the adoption
of SFAS No. 123R will result in approximately $3.0 million of additional stock compensation expense in fiscal
2006.
Accounting for Income Taxes
Deferred taxes are determined based on the difference between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to
reverse. Valuation allowances are provided if based upon the weight of available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized.
To date, for U.S. federal income tax purposes, we have operated in a loss position. We have $10.8 million
of net operating loss carry-forwards as of December 31, 2005, although the use of these net operating loss
carry-forwards may be limited by changes in our ownership. We expect that these net operating loss carry-
forwards will impact our effective tax rate over the next several years. There, however, can be no assurance as
to the rate at which these net operating loss carry-forwards can be utilized, or as to whether there will be any
other tax incentives available after 2005.
We monitor the realization of our deferred tax assets based on changes in circumstances, for example,
recurring periods of income for tax purposes following historical periods of cumulative losses or changes in tax
laws or regulations. Our income tax provision and our assessment of the realizability of our deferred tax assets
involve significant judgments and estimates. If we continue to generate taxable income through profitable
operations in future years we may be required to recognize these deferred tax assets through the reduction of
the valuation allowance which would result in a material benefit to our results of operations in the period in
which the benefit is determined, excluding the recognition of the portion of the valuation allowance which
relates to stock compensation.
Warranty
We provide a one-year warranty against defects in materials and workmanship and will either repair the
goods, provide replacement products at no charge to the customer or refund amounts to the customer for
defective products. We record estimated warranty costs, based on historical experience by product, at the time
we recognize product revenue. As the complexity of our products increases, we could experience higher
warranty claims relative to sales than we have previously experienced, and we may need to increase these
estimated warranty reserves.
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