iRobot 2010 Annual Report Download - page 78

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contract terms. Changes in job performance, job conditions and estimated profitability, including those arising from
final contract settlements and government audit, may result in revisions to costs and income, and are recorded or
recognized, as the case may be, in the period in which the revisions are determined. Since many contracts extend
over a long period of time, revisions in cost and funding estimates during the progress of work have the effect of
adjusting earnings applicable to past performance in the current period. When the current contract estimate
indicates a loss, provision is made for the total anticipated loss in the current period. Revenue earned in excess of
billings, if any, is recorded as unbilled revenue. Billings in excess of revenue earned, if any, are recorded as deferred
revenue.
Accounting for Stock-Based Awards
Under the provisions of the relevant authoritative guidance, we recognized $6.4 million of stock-based
compensation expense during the fiscal year ended January 1, 2011 for stock options granted subsequent to our
initial filing of our Form S-1 with the SEC. The unamortized fair value as of January 1, 2011 associated with these
grants was $12.0 million with a weighted average remaining recognition period of 2.65 years.
The risk-free interest rate is derived from the average U.S. Treasury constant maturity rate, which approx-
imates the rate in effect at the time of grant, commensurate with the expected life of the instrument. The dividend
yield is zero based upon the fact that we have never paid and have no present intention to pay cash dividends. Prior to
2010, the expected term calculation was based upon the simplified method provided under the relevant authoritative
guidance. During 2010, we began to rely solely on company specific historical data to calculate the expected term.
Given our initial public offering in November 2005 and the resulting short history as a public company, we could not
rely solely on company specific historical data for purposes of establishing expected volatility. Consequently, prior
to 2010, we performed an analysis that included company specific historical data combined with data of several peer
companies with similar expected option lives to develop expected volatility assumptions. During 2010, we began to
rely solely on company specific historical data for purposes of establishing expected volatility.
Based upon the above assumptions, the weighted average fair value of each stock option granted for the fiscal
year ended January 1, 2011 was $8.24.
During the fiscal year ended January 1, 2011, the Company recognized $0.1 million and $1.7 million of stock
based compensation associated with restricted stock awards and restricted stock units, respectively. Unamortized
expense associated with restricted stock awards and restricted stock units at January 1, 2011, was $0.1 million and
$7.6 million, respectively.
We have assumed a forfeiture rate for all stock options, restricted stock awards and restricted stock-based units
granted subsequent to the Company’s initial filing of its Form S-1 with the SEC. In the future, we will record
incremental stock-based compensation expense if the actual forfeiture rates are lower than estimated and will record
a recovery of prior stock-based compensation expense if the actual forfeitures are higher than estimated.
Accounting for stock-based awards requires significant judgment and the use of estimates, particularly
surrounding assumptions such as stock price volatility and expected option lives, as well as expected option
forfeiture rates to value equity-based compensation.
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.
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 ability to realize our deferred tax assets involve
significant judgments and estimates. In fiscal 2007, we completed an analysis of historical and projected future
profitability which resulted in the full release of the valuation allowance relating to federal deferred tax assets. In
fiscal 2010, based on recent and expected increased future profitability the valuation allowance relating to state
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