Facebook 2012 Annual Report Page 56

for them as post-acquisition share-based compensation expense. We recognize compensation expense equal to
the grant date fair value of the common stock on a straight-line basis over the employee's required service
period.

We capitalize share-based employee compensation expense when appropriate. We did not capitalize any

share-based compensation expense in the three years ended December 31, 2012.

Loss Contingencies

We are involved in various lawsuits, claims, investigations and proceedings that arise in the ordinary course

of business. Certain of these matters include speculative claims for substantial or indeterminate amounts of
damages. We record a liability when we believe that it is both probable that a loss has been incurred and the
amount can be reasonably estimated. Significant judgment is required to determine both probability and the
estimated amount. We review these provisions at least quarterly and adjust these provisions accordingly to reflect
the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information.

In the opinion of management, there was not at least a reasonable possibility we may have incurred a

material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for legal and
other contingencies as of December 31, 2012. However, the outcome of litigation is inherently uncertain.
Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of
these legal matters were resolved against us in the same reporting period for amounts in excess of management's
expectations, our consolidated financial statements of a particular reporting period could be materially adversely
affected.

Business Combinations and Valuation of Goodwill and Other Acquired Intangible Assets

We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and

intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase
consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such
valuations require management to make significant estimates and assumptions, especially with respect to
intangible assets. During the measurement period, which is one year from the acquisition date, we may record
adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the
conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

We review goodwill for impairment at least annually or more frequently if events or changes in

circumstances indicate that the carrying value of goodwill may not be recoverable. We have elected to first assess
the qualitative factors to determine whether it is more likely than not that the fair value of our single reporting
operating unit is less than its carrying amount as a basis for determining whether it is necessary to perform the
two-step goodwill impairment under the new authoritative guidance issued by the Financial Accounting
Standards Board (FASB). If we determine that it is more likely than not that its fair value is less than its carrying
amount, then the two-step goodwill impairment test will be performed. The first step, identifying a potential
impairment, compares the fair value of the reporting unit with its carrying amount. If the carrying amount
exceeds its fair value, the second step will be performed; otherwise, no further step is required. The second step,
measuring the impairment loss, compares the implied fair value of the goodwill with the carrying amount of the
goodwill. Any excess of the goodwill carrying amount over the applied fair value is recognized as an impairment
loss, and the carrying value of goodwill is written down to fair value. As of December 31, 2012, no impairment
of goodwill has been identified.

Acquired intangible assets are amortized over their estimated useful lives. We evaluate the recoverability of

amortizable intangible assets for possible impairment whenever events or circumstances indicate that the
carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by a
comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If