cisco-annual-report-2021

(s) Share-Based Compensation Expense We measure and recognize the compensation expense for all share-based awards
made to employees and directors, including employee stock options, restricted stock units (RSUs), performance-based restricted
stock units (PRSUs), and employee stock purchases related to the Employee Stock Purchase Plan (Employee Stock Purchase
Rights) based on estimated fair values. The fair value of employee stock options is estimated on the date of grant using a latticebinomial
option-pricing model (Lattice-Binomial Model) or the Black-Scholes model, and for employee stock purchase rights
we estimate the fair value using the Black-Scholes model. The fair value for time-based stock awards and stock awards that are
contingent upon the achievement of financial performance metrics is based on the grant date share price reduced by the present
value of the expected dividend yield prior to vesting. The fair value of market-based stock awards is estimated using an optionpricing
model on the date of grant. Share-based compensation expense is reduced for forfeitures.
(t) Software Development Costs Software development costs, including costs to develop software sold, leased, or otherwise
marketed, that are incurred subsequent to the establishment of technological feasibility are capitalized if significant. Costs
incurred during the application development stage for internal-use software are capitalized if significant. Capitalized software
development costs are amortized using the straight-line amortization method over the estimated useful life of the applicable
software. Such software development costs required to be capitalized have not been material to date.
(u) Income Taxes Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are
recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their
reported amounts. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not
be realized.
We account for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions.
The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is
more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes,
if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon
settlement. We classify the liability for unrecognized tax benefits as current to the extent that we anticipate payment (or receipt)
of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.
(v) Computation of Net Income per Share Basic net income per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number
of common shares and dilutive potential common shares outstanding during the period. Diluted shares outstanding includes the
dilutive effect of in-the-money options, unvested restricted stock, and restricted stock units. The dilutive effect of such equity
awards is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury
stock method, the amount the employee must pay for exercising stock options and the amount of compensation cost for future
service that we have not yet recognized are collectively assumed to be used to repurchase shares.
(w) Consolidation of Variable Interest Entities Our approach in assessing the consolidation requirement for variable interest
entities focuses on identifying which enterprise has the power to direct the activities that most significantly impact the variable
interest entity’s economic performance and which enterprise has the obligation to absorb losses or the right to receive benefits
from the variable interest entity. Should we conclude that we are the primary beneficiary of a variable interest entity, the assets,
liabilities, and results of operations of the variable interest entity will be included in our Consolidated Financial Statements.
(x) Use of Estimates The preparation of financial statements and related disclosures in conformity with accounting principles
generally accepted in the United States requires management to make estimates and judgments that affect the amounts reported
in the Consolidated Financial Statements and accompanying notes. Estimates are used for the following, among others:
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Revenue recognition
Allowances for accounts receivable, sales returns, and financing receivables
Inventory valuation and liability for purchase commitments with contract manufacturers and suppliers
Loss contingencies and product warranties
Fair value measurements
Goodwill and purchased intangible asset impairments
Income taxes
The inputs into certain of our judgments, assumptions, and estimates considered the economic implications of the COVID-19
pandemic on our critical and significant accounting estimates. The actual results experienced by us may differ materially from
our estimates. As the COVID-19 pandemic continues, many of our estimates could require increased judgment and carry a
higher degree of variability and volatility. As events continue to evolve our estimates may change materially in future periods.
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