Yahoo! (YHOO)

Stock-Based Compensation.  Prior to January 1, 2006, the Company accounted for employee stock-based compensation using the intrinsic value method supplemented by pro forma disclosures in accordance with APB 25 and SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123.”  Under the intrinsic value method, the recorded stock-based compensation expense was related to the amortization of the intrinsic value of Yahoo! stock options issued and assumed in connection with business combinations and other stock-based awards issued by the Company.  Options granted with exercise prices equal to the grant date fair value of the Company’s stock have no intrinsic value and therefore no expense was recorded for these options under APB 25.  For stock options whose exercise price was below the grant date fair value of the Company’s stock (principally options assumed in business combinations), the difference between the exercise price and the grant date fair value of the Company’s stock was expensed over the service period (generally the vesting period) using an accelerated amortization approach in accordance with FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.”  Other stock-based awards for which stock-based compensation expense was recorded were generally grants of restricted stock awards which were measured at fair value on the date of grant based on the number of shares granted and the quoted price of the Company’s common stock.  Such value was recognized as an expense over the corresponding service period.

Effective January 1, 2006 the Company adopted SFAS 123R using the modified prospective approach and accordingly prior periods have not been restated to reflect the impact of SFAS 123R.  Under SFAS 123R, stock-based awards granted prior to its adoption are expensed over the remaining portion of their vesting period.  These awards are expensed under the accelerated amortization approach using the same fair value measurements which were used in calculating pro forma stock-based compensation expense under SFAS 123.  For stock-based awards granted on or after January 1, 2006, the Company records stock-based compensation expense on a straight-line basis over the requisite service period, which is generally a four year vesting period.  SFAS 123R requires that the deferred stock-based compensation on the condensed consolidated balance sheet on the date of adoption be netted against additional paid-in capital.  As of December 31, 2005, there was a balance of $235 million of deferred stock-based compensation that was netted against additional paid-in capital on January 1, 2006.

For the three and nine months ended September 30, 2006, the Company recorded stock-based compensation expense of $121 million and $330 million, respectively, which reduced gross profit by $2 million and $5 million, respectively.  As a result of adopting SFAS 123R the Company’s income from operations for the three and nine months ended September 30, 2006 was lower by $92 million and $255 million, respectively, and net income by $60 million and $174 million, respectively, than if the Company had continued to account for stock-based compensation under APB 25.  Basic and diluted net income per share for the three and nine months ended September 30, 2006 was $0.04 and $0.12 lower, respectively, than if the Company had continued to account for stock-based compensation under APB 25.  For the three and nine months ended September 30, 2005, the Company recognized $14 million and $34 million, respectively, of stock-based compensation expense under the intrinsic value method.

SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.  Stock-based compensation expense was recorded net of estimated forfeitures for the three and nine months ended September 30, 2006 such that expense was recorded only for those stock-based awards that are expected to vest.  Previously under APB 25 to the extent awards were forfeited prior to vesting, the corresponding previously recognized expense was reversed in the period of forfeiture.  Upon the adoption of SFAS 123R, the Company recorded a cumulative adjustment to account for the expected forfeitures of stock-based awards granted prior to January 1, 2006 for which the Company previously recorded an expense.  This adjustment was not material and was recorded as a reduction to stock-based compensation expense in the three months ended March 31, 2006.

Upon the adoption of SFAS 123R, the Company included as part of cash flows from financing activities the gross benefit of tax deductions related to stock-based awards in excess of the grant date fair value of the related stock-based awards for the options exercised during the nine months ended September 30, 2006 and certain options exercised in prior periods.  This amount is shown as a reduction to cash flows from operating activities and an increase to cash flows from financing activities.  Total cash flows remain unchanged from what would have been reported prior to the adoption of SFAS 123R.

Stock-Based Compensation.  Prior to January 1, 2006, the Company accounted for employee stock-based compensation using the intrinsic value method supplemented by pro forma disclosures in accordance with APB 25 and SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No.148 “Accounting for Stock-Based Compensation—Transition and Disclosures.”  Under the intrinsic value method, the recorded stock-based compensation expense was related to the amortization of the intrinsic value of Yahoo! stock options issued and assumed in connection with business combinations and other stock-based awards issued by the Company.  Options granted with exercise prices equal to the grant date fair value of the Company’s stock have no intrinsic value and therefore no expense was recorded for these options under APB 25.  For stock options whose exercise price was below the grant date fair value of the Company’s stock (principally options assumed in business combinations), the difference between the exercise price and the grant date fair value of the Company’s stock was expensed over the service period (generally the vesting period) using an accelerated amortization approach in accordance with FASB Interpretation No. 28 “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.”  Other stock-based awards for which stock-based compensation expense was recorded were generally grants of restricted stock awards which were measured at fair value on the date of grant based on the number of shares granted and the quoted price of the Company’s common stock.  Such value was recognized as an expense over the corresponding service period.     

 

Effective January 1, 2006 the Company adopted SFAS 123R using the modified prospective approach and accordingly prior periods have not been restated to reflect the impact of SFAS 123R.  Under SFAS 123R, stock-based awards granted prior to its adoption are expensed over the remaining portion of their vesting period.  These awards are expensed under the accelerated amortization approach using the same fair value measurements which were used in calculating pro forma stock-based compensation expense under SFAS 123.  For stock-based awards granted on or after January 1, 2006, the Company records stock-based compensation expense on a straight-line basis over the requisite service period, which is generally a four year vesting period.  SFAS 123R requires that the deferred stock-based compensation on the condensed consolidated balance sheet on the date of adoption be netted against additional paid-in capital.  As of December 31, 2005, there was a balance of $235 million of deferred stock-based compensation that was netted against additional paid-in capital on January 1, 2006.

 

For the three and six months ended June 30, 2006, the Company recorded stock-based compensation expense of $100 million and $208 million, respectively, which reduced gross profit by $2 million and $3 million, respectively.  As a result of adopting SFAS 123R the Company’s income from operations for the three and six months ended June 30, 2006 was lower by $76 million and $163 million, respectively, and net income by $55 million and $113 million, respectively, than if the Company had continued to account for stock-based compensation under APB 25.  Basic and diluted net income per share for the three and six months ended June 30, 2006 was $0.04 and $0.08 lower, respectively than if the company had continued to account for stock-based compensation under APB 25.  For the three and six months ended June 30, 2005, the Company recognized $11 million and $20 million, respectively, of stock-based compensation expense under the intrinsic value method. 

 

SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual

 

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Stock-Based Compensation.  Effective January 1, 2006 we adopted SFAS 123R and our condensed consolidated financial statements as of and for the three months ended March 31, 2006 reflect the impact of SFAS 123R.  For the three months ended March 31, 2006, we recorded stock-based compensation expense of $109 million which reduced gross profit by $2 million, income from operations by $109 million and net income by $71 million.  The impact on basic and diluted net income per share for the three months ended March 31, 2006 was $0.05 and $0.04 respectively.  We also capitalized $2 million of stock-based compensation expense in the three months ended March 31, 2006 which is now part of property and equipment, net on the condensed consolidated balance sheet.  For the three months ended March 31, 2005, we recognized $9 million of stock-based compensation expense under the intrinsic value method in accordance with APB 25.  In addition, prior to the adoption of SFAS 123R, we presented tax benefits from stock-based compensation as cash flow from operating activities.  Upon the adoption of SFAS 123R, the benefit of tax deductions related to stock-based compensation in excess of the grant date fair value of the related stock-based awards are now classified as cash flows from financing activities.  See Note 10—“Stock-Based Compensation” of the condensed consolidated financial statements for further information.