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Litigation and Other Contingencies
When we become aware of a claim or potential claim, we assess the likelihood of any loss or exposure. We dis-
close information regarding each material claim where the likelihood of a loss contingency is probable or reasonably
possible. If a loss contingency is probable and the amount of the loss can be reasonably estimated, we record an accrual
for the loss. In such cases, there may be an exposure to potential loss in excess of the amount accrued. Where a loss is
not probable but is reasonably possible, or where a loss in excess of the amount accrued is reasonably possible, we dis-
close an estimate of the amount of the loss or range of possible losses for the claim if a reasonable estimate can be
made, unless the amount of such reasonably possible losses is not material to our financial position, results of oper-
ations or cash flows. The ability to predict the ultimate outcome of such matters involves judgments, estimates and
inherent uncertainties. The actual outcome of such matters could differ materially from management's estimates.
Refer to Part II, Item 8, Note 5 in the Notes to Consolidated Financial Statements, included in this Annual Report on
Form 10-K.
Income Taxes
We account for income taxes under the asset and liability method, which provides that deferred tax assets and
liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of our assets
and liabilities and expected benefits of utilizing net operating loss and tax credit carryforwards. We record a valuation
allowance when it is more likely than not that the deferred tax assets will not be realized. Each period, we evaluate the
need for a valuation allowance for our deferred tax assets and we adjust the valuation allowance so that we record net
deferred tax assets only to the extent that we conclude it is more likely than not that these deferred tax assets will be
realized.
We recognize liabilities for uncertain tax positions based on a two-step process. To the extent a tax position does
not meet a more-likely-than-not level of certainty, no benefit is recognized in the financial statements. If a position
meets the more-likely-than-not level of certainty, it is recognized in the financial statements at the largest amount
that has a greater than 50% likelihood of being realized upon ultimate settlement. Interest and penalties related to
unrecognized tax benefits are recognized on liabilities recorded for uncertain tax positions and are recorded in our
provision for income taxes. The actual liability for unrealized tax benefits in any such contingency may be materially
different from our estimates, which could result in the need to record additional liabilities for unrecognized tax bene-
fits or potentially adjust previously-recorded liabilities for unrealized tax benefits and materially affect our operating
results.
Stock-based Compensation
We account for all stock-based compensation at fair value. Stock-based compensation cost is measured at the grant
date based on the value of the award and is recognized as expense over the vesting period. The fair values of all stock
options and cash-settled stock appreciation rights ("SARs") granted are estimated using a binomial model, and the fair
values of all Employee Stock Purchase Plan purchase rights are estimated using the Black-Scholes-Merton option-pricing
model. We account for SARs as liability awards based upon our intention to settle such awards in cash. The SARs
liability is recognized for that portion of fair value for the service period rendered at the reporting date. The share-based
liability is remeasured at each reporting date through the requisite service period. Both the binomial and the Black-
Scholes-Merton models require the input of highly subjective assumptions. We are required to use judgment in estimat-
ing the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ significantly from the
original estimate, stock-based compensation expense and our results of operations could be materially affected.
Goodwill and Other Long-Lived Assets
The fair value of assets acquired and liabilities assumed in a business acquisition are recognized at the acquisition
date, with amounts exceeding the fair values being recognized as goodwill. Goodwill is not amortized. Instead, it is
tested for impairment on an annual basis or more frequently whenever events or changes in circumstances indicate
that goodwill may be impaired. During 2013, we changed the date of our annual impairment test from the last day of
May to the first day of our fiscal fourth quarter. We believe changing the test date to the first day of our fiscal fourth
quarter is preferable as it allows us additional time to complete the impairment test.
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