Corning 2007 Annual Report

1. Summary of Significant Accounting Policies (continued)
At the time revenue is recognized, allowances are recorded, with the related reduction to revenue, for estimated product returns,
allowances and price discounts based upon historical experience and related terms of customer arrangements. Where we have offered
product warranties, we also establish liabilities for estimated warranty costs based upon historical experience and specific warranty
provisions. Warranty liabilities are adjusted when experience indicates the expected outcome will differ from initial estimates of the
liability.
Other Income, Net
Royalty income from the licensing of technology is reported as other non-operating income and is recognized as it is earned. For all
periods presented, royalty income represents the largest item included in “Other income, net” in Corning’s consolidated statements of
operations. For 2007, 2006, and 2005, royalty income was $168 million, $110 million, and $81 million.
Research and Development Costs
Research and development costs are charged to expense as incurred. Research and development costs totaled $446 million in 2007,
$409 million in 2006, and $348 million in 2005.
Foreign Currency Translation and Transactions
The determination of the functional currency for Corning’s foreign subsidiaries is made based on the appropriate economic factors.
For most foreign operations, the local currencies are generally considered to be the functional currencies. Corning’s most significant
exception is our Taiwanese subsidiary which uses the Japanese yen as its functional currency. For all transactions denominated in a
currency other than a subsidiary’s functional currency, exchange rate gains and losses are included in income for the period in which
the exchange rates changed.
Foreign subsidiary functional currency balance sheet accounts are translated at current exchange rates, and statement of operations
accounts are translated at average exchange rates for the year. Translation gains and losses are recorded as a separate component of
accumulated other comprehensive income (loss) in shareholders’ equity. The effects of remeasuring non-functional currency assets
and liabilities into the functional currency are included in current earnings.
Stock-Based Compensation
Corning implemented the provisions of SFAS 123(R) on January 1, 2006, following the “prospective adoption” transition method and
accordingly began expensing share-based payments in the first quarter of 2006. Following the prospective adoption transition method
prior periods were not restated.
Corning grants restricted shares and stock options that are subject to specific vesting conditions (for example, three-year graded
vesting). For stock options granted prior to January 1, 2006, Corning specified that the employee will continue to vest in the award
after retirement without providing any additional services. Corning accounted for this type of arrangement by recognizing
compensation cost on a pro forma disclosure basis over the requisite vesting period (the “stated vesting period approach”). For timebased
and performance-based restricted shares granted prior to January 1, 2006, Corning specified that the employee will vest in the
award after retirement without providing any additional services. Corning accounted for this type of arrangement by recognizing
compensation cost over the nominal vesting period and, if the employee retires before the end of the vesting period, recognizing any
remaining unrecognized compensation cost at the date of retirement (the “nominal vesting period approach”).
SFAS 123(R) specifies that an award is vested when the employee’s retention of the award is no longer contingent on providing
subsequent service (the “non-substantive vesting period approach”). That would be the case for Corning awards that vest when
employees retire and are granted to retirement eligible employees. Effective January 1, 2006, related compensation cost must be
recognized immediately for awards granted to retirement eligible employees or over the period from the grant date to the date
retirement eligibility is achieved, if that is expected to occur during the nominal vesting period.
We continue to follow the stated and nominal vesting period approaches for any share-based awards granted prior to adopting SFAS
123(R) and will continue to do so for the remaining portion of such unvested outstanding awards after adopting SFAS 123(R).
Effective with the adoption of SFAS 123(R), on January 1, 2006, we now apply the non-substantive vesting period approach to new
grants that have retirement eligibility provisions.
Refer to Note 17 (Share-based Compensation) to the Consolidated Financial Statements for additional information.
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