Stock-based compensation expense
We measure stock-based compensation expense for equity-classified awards, principally related to stock
options, restricted stock units, or RSUs, and stock purchase rights under our ESPP based on the estimated fair
value of the award on the date of grant. We recognize the value of the portion of the award that we ultimately
expect to vest as stock-based compensation expense over the requisite service period in our consolidated
statements of operations. We reduce stock-based compensation expense for estimated forfeitures at the time of
grant and revise in subsequent periods if actual forfeitures differ from those estimates.
We use the Black-Scholes model as our method of valuing option awards and stock purchase rights under
our ESPP. On the grant date, we use our stock price and assumptions regarding a number of highly complex and
subjective variables to determine the estimated fair value of stock-based payment awards. These variables
include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating
the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because our
employee stock options have certain characteristics that are significantly different from traded options, and
because changes in the subjective assumptions can materially affect the estimated value, in management’s
opinion, the existing valuation models may not provide an accurate measure of the fair value of our employee
stock options. Although we determine the estimated fair value of employee stock options using an option-pricing
model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market
transaction.
We recognize compensation expense for option awards using the accelerated multiple-option approach.
Under the accelerated multiple-option approach (also known as the graded-vesting method), an entity recognizes
compensation expense over the requisite service period for each separately vesting tranche of the award as
though the award were in substance multiple awards, which results in the expense being front-loaded over the
vesting period.
In 2012, we began granting RSUs to our employees and our board of directors. The fair value of RSUs is
based on the market price of our common stock on the date of grant. The RSUs we have granted vest annually
over a four year period.
See Note 5,
Stockholders’ Equity,
for additional information regarding our share-based compensation plans.
Accumulated other comprehensive income
Accumulated other comprehensive income is comprised of unrealized gains and losses on investments, net
of taxes, and adjustments we made to reclassify realized gains and losses on investments from other accumulated
comprehensive income to our consolidated statement of operations. The following table summarizes changes in
accumulated other comprehensive income for the years ended December 31, 2014, 2013 and 2012 (in thousands):
Year Ended December 31,
2014
2013
2012
Beginning balance accumulated other comprehensive income (loss). . . $ 21,080 $12,480 $ (770)
Other comprehensive income before reclassifications,
net of tax (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,079 10,253 13,250
Amounts reclassified from accumulated other comprehensive
income (2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(21,412) (1,653)
—
Net current period other comprehensive income. . . . . . . . . . . . . . . . . . .
18,667 8,600 13,250
Ending balance accumulated other comprehensive income . . . . . . . . . . $ 39,747 $21,080 $12,480
(1) Other comprehensive income includes income tax expense of $12.8 million, $5.9 million and $9.1 million for the years ended
December 31, 2014 and 2013 and 2012, respectively.
(2) Included in gain on investments, net on our consolidated statement of operations.
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