The process of evaluating the potential impairment of goodwill is highly
subjective and requires significant judgment at many points during the analysis.
Qualitative assessments regarding goodwill involve a high degree of judgment and
can entail subjective considerations. Our estimates of the fair value of the
reporting units for the purposes of our annual or interim analyses require
estimates and judgments about the future cash flows of these businesses. The
cash flow forecasts are based on assumptions that are consistent with the plans
and estimates used to manage the underlying reporting units and factor in
assumptions on revenue and expense growth rates. These estimates are based upon
our historical experience and projections of future activity, including
assumptions relating to customer demand, changes in technology and the cost
structure necessary to achieve the related revenues. Additionally, these cash
flow analyses factor in expected amounts of working capital and weighted average
cost of capital. Changes in judgments on any of these factors could materially
impact the value of the reporting unit. We also consider our market
capitalization on the date the analysis is performed. A determination that
goodwill or intangible assets are impaired (which could result from a change in
our assumptions) could have a significant impact on our operating results. As of
Financial Statements. Share-based compensation
We account for our option awards granted under our stock option program by estimating fair value of option awards as of the date of grant. Non-cash share-based compensation expenses, which are based on the estimated value of the option awards adjusted for expected pre-vesting forfeitures, are recognized ratably over the requisite service (i.e. vesting) period of options in the consolidated statement of operations.
We value stock options using the Black-Scholes option pricing model, which was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions. Therefore, we are required to input highly subjective assumptions about volatility rates, expected term of options, dividend yields and applicable interest rates in determining the estimated fair value. Expected volatility is based on historical stock prices. The expected term of options granted is based on historical option activities, adjusted for the remaining option life cycle by assuming ratable exercise of any unexercised vested options over the remaining term. For this purpose, we separate groups of associates that have historically exhibited similar behavior with regard to option exercises and post-vesting cancellations. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Total share-based compensation expense recorded from period to period can be significantly different depending on several variables, including the number of options granted, any changes to assumptions such as pre-vesting cancellations and the estimated fair value of those vested awards. However, unlike all of the other accounting estimates described in this section, changes in estimates regarding stock options affect only newly granted options; they do not result in a change in previously recorded amounts.