Summary of Significant Accounting Policies and Related Data	12 Months Ended
Apr. 26, 2013
Summary of Significant Accounting Policies and Related Data [Abstract]
Summary of Significant Accounting Policies and Related Data	Note 1. Summary of Significant Accounting Policies and Related Data Nature of Operations. We are a medical device company incorporated in 1987, engaged in the design, development, sales and marketing of implantable medical devices that deliver a unique therapy, vagus nerve stimulation (“VNS”) therapy (“VNS Therapy®”), using pulsed electrical signals applied to the vagus nerve for the treatment of refractory epilepsy and treatment-resistant depression (“TRD”). We are focused on creating new markets, improving our products, developing new medical devices for patients with epilepsy and expanding our business into other neuroscience opportunities. We are headquartered in Houston, Texas, and are approved to market the VNS Therapy System in more than 72 countries worldwide. To date more than an estimated 82,000 patients have been implanted with the device. In 2001, we obtained regulatory approval for commercial distribution of the VNS Therapy System for the treatment of depression in the European market and in Canada. In July 2005, the U.S. Food and Drug Administration (“FDA”) approved the VNS Therapy System as an adjunctive long-term treatment of chronic or recurrent depression for patients 18 years of age or older who are experiencing a major depressive episode and have not had an adequate response to four or more adequate antidepressant treatments. In May 2007, CMS concluded that Medicare coverage is not available for VNS Therapy as a treatment for TRD. As a result of new clinical evidence, including the completion of a post-approval dosing study and publication in four peer-reviewed journals, we recently submitted a formal request to CMS for reconsideration of its determination and requested coverage for VNS Therapy for TRD for a sub-population of Medicare beneficiaries that is estimated to represent approximately 0.2% of CMS’s patient population. CMS declined our request for reconsideration on May 28, 2013. We plan to evaluate options for appealing this decision and to work with other interested parties to continue to pursue access to VNS Therapy for patients experiencing TRD. Fiscal Year-End. We utilize a 52/53-week fiscal year that ends the last Friday in April. Our fiscal years 2013, 2012 and 2011, which ended April 26, 2013, April 27, 2012 and April 29, 2011, respectively, were 52-week years. Basis of Presentation. We have adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S.”) (“U.S. GAAP”). Use of Estimates. The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in such financial statements and accompanying notes. These estimates are based on management's best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, useful lives for depreciation of plant and equipment, valuation of intangible asset investments, amortization of intangible assets, deferred tax assets and liabilities and uncertain income tax positions and stock-based compensation. Actual results could differ materially from those estimates. Consolidation. The accompanying consolidated financial statements include Cyberonics, Inc. and our wholly-owned subsidiaries: Cyberonics Europe BVBA/SPRL (“Cyberonics Europe BVBA”), Cyberonics France Sarl, Cyberonics Holdings LLC, CYBX Netherlands C.V., Cyberonics Spain, S.L. and Cyberonics Latam, S.R.L. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents. Our cash and cash equivalents consist of highly liquid investments with a maturity of three months or less at the time of purchase. Accounts Receivable. Our accounts receivable consists of trade receivables resulting from the granting of credit to our direct customers and distributors in the normal course of business. We maintain an allowance for doubtful accounts for potential credit losses based on our estimates of the ability of customers to make required payments, historical credit experience and expected future trends. We write off uncollectible accounts against the allowance when all reasonable collection efforts have been exhausted. Inventories. We state our inventories at the lower of cost, using the first-in first-out (“FIFO”) method, or market. Our calculation of cost includes the acquisition cost of raw materials and components, direct labor and overhead. Property, Plant and Equipment. Property, plant and equipment (“PP&E”) are carried at cost, less accumulated depreciation. Maintenance, repairs and minor replacements are charged to expense as incurred; significant renewals and betterments are capitalized. We compute depreciation using the straight-line method over estimated useful lives ranging from three to nine years, except for the building and building improvements. PP&E are reviewed for impairment indicators every reporting period. Acquisition of our Building. During the fiscal year ended April 27, 2012, we acquired the land and building in which we headquarter our operations in Houston, Texas for a purchase price of $11.7 million. A portion of the building was leased to tenants other than ourselves, and therefore the acquisition was accounted for using the acquisition method under Business Combination accounting rules. Under the acquisition method, an acquirer is required to recognize and measure the identifiable assets acquired and the liabilities assumed at their fair market values as of the acquisition date and to record identifiable intangible assets at fair value, including identifiable intangibles associated with the in-place leases at the acquisition date. We determined that the values of in-place leases were immaterial and therefore no separate intangible assets were recorded. Based on independent appraisals, we determined the purchase price approximated the fair value of the land, the building and the leasehold improvements; therefore, no bargain purchase or goodwill was recognized on acquisition. The land has an indefinite life and the building is depreciated over a 39-year life. Capital improvements to the building are added as building components and depreciated over the useful life of the improvement or the building, whichever is less. The depreciation period of the leasehold improvements that existed at the time of the building purchase was adjusted to a useful life of seven years starting in September 2011. Intangible Assets. Intangible assets, as shown on the consolidated balance sheets, consisted of developed technology rights, license agreements and other intangible assets. These assets relate primarily to seizure detection, wireless communication, rechargeable battery technology, external charging accessory hardware and associated software, an implantable lead with magnetic resonance imaging (“MRI”) compatibility and micro-processor technologies. We amortize our intangible assets on a straight-line basis over the useful life of the asset. Our estimates of useful life of intangible assets is based on the relevancy of the technology to our research and development efforts and to our future product plans. Amortization is charged to research and development until product commercialization, at which point cost of goods sold would be charged. We evaluate our intellectual property each reporting period to determine whether events and circumstances indicate either a different amortization period or impairment. If we change our estimate of the useful lives of our intellectual property, we amortize the carrying amount over the revised remaining useful life. If we identify an impairment indicator, such as an asset that no longer factors into our product commercialization plans, we test the intellectual property for recoverability, and if the carrying amount is not recoverable and exceeds its fair value, impairment is recognized and charged to research and development. Investments Short-term investments. Our short-term investments are carried at cost, which approximates market value, and consist of certificates of deposit with maturities ranging from six months to one year. Long-term investments. We have invested in a convertible debt instrument and convertible preferred shares of privately-held, development-stage medical device companies. The convertible debt instrument was accounted for at fair value as an available-for-sale debt security. The convertible preferred shares are accounted for under the cost method. We own less than 20% of the equity in these entities and do not have the ability to exercise significant influence over the investee. We review the equity investments for events or circumstances that indicate a significant adverse effect on their fair value. If we identify events or changes in circumstances that indicate a decrease in value of the equity investments that is other-than-temporary we recognize a loss. Revenue Recognition. Product Revenue: We sell our products through a direct sales force in the U.S. and a combination of direct sales representatives and independent distributors in international markets. Management maintains policies for sales returns and exchanges in order to control returns and exchanges. We recognize revenue when title to the goods and risk of loss transfers to customers or our independent distributors. We estimate expected sales returns based on historical data and record a reduction of sales with a return reserve when we sell the product. License Revenue:We amortize upfront payments received under license agreements over the life of our obligations under the agreements to prosecute the licensed patent applications. Effective December 17, 2007, we entered into an agreement granting an exclusive license to certain patents and patent applications pertaining to weight reduction, hypertension and diabetes in exchange for an up-front, non-refundable payment of $9.5 million, plus a royalty on future commercial sales of any product covered by the licensed patents. We retain the responsibility to prosecute the licensed patent applications and estimate that our obligation to prosecute the licensed patent applications will be satisfied during the fiscal year 2014. Accordingly, we are recognizing, as license revenue, the amortization of the $9.5 million up-front payment, on a straight-line basis from the date of execution of the agreement. The unrecognized portion of the $9.5 million payment, $1.5 million at April 26, 2013, was included in Other Long-Term Liabilities in our consolidated balance sheet. Medical Device Excise Tax (“MDET”). Section 4191 of the Internal Revenue Code enacted by the Health Care and Education Reconciliation Act of 2010, in conjunction with the Patient Protection and Affordable Care Act, established a 2.3% excise tax on medical devices sold domestically beginning on January 1, 2013. We account for the MDET in cost of sales. For the four months ended April 26, 2013 we included $1.2 million of MDET in cost of sales on the consolidated statement of income. Research and Development (R&D). All R&D costs are expensed as incurred. R&D costs include costs of all basic research activities, as well as engineering and technical effort required to develop a new product or make significant improvement to an existing product or manufacturing process. R&D costs also include regulatory, clinical trial expenses and the amortization of purchased intellectual property utilized in R&D projects. Stock-Based Compensation Stock-Based Incentive Awards. We grant stock-based incentive awards to directors, officers, key employees and consultants on four pre-determined days during each fiscal year. We measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair market value of the award. We recognize equity-based compensation expense ratably over the period that an employee is required to provide service in exchange for the award (vesting period). We issue new shares upon share option exercise, vesting of a restricted share unit or the award of restricted stock. Stock Options. Options granted under the Stock Plans are service-based and typically vest annually over four or five years, or cliff-vest in one to three years, following their date of grant as required under the applicable agreement establishing the award and have maximum terms of 10 years. Stock option grant prices are set equal to the closing price of our common stock on the day of the grant. There are no post-vesting restrictions on the shares issued. We use the Black-Scholes option pricing methodology to calculate the grant date fair market value of stock option awards. This methodology takes into account variables such as the future expected volatility of our stock price, the amount of time expected to elapse between the date of grant and the date of exercise and a risk-free interest rate. Compensation cost is expensed ratably over the service period. Restricted Stock and Restricted Stock Units. We grant restricted stock and restricted stock units at no purchase cost to the grantee. Unvested restricted stock entitles the grantees to dividends, if any, and voting rights for their respective shares. Sale or transfer of the shares and share units are restricted until they are vested. We issue new shares for our restricted stock and restricted stock unit awards. Under our stock-based compensation plans we repurchase a portion of these shares from our employees to permit our employees to meet their minimum statutory tax withholding requirements on vesting of their restricted stock, unless the employee opts for cash settlement of taxes. Under this plan we expect to repurchase, and place in treasury, as many as 58,819 shares during fiscal year 2014. Service-Based Restricted Stock and Restricted Stock Units. The fair market value of serviced-based restricted stock and restricted stock units are determined using the market closing price on the grant date, and compensation is expensed ratably over the vesting period. Calculation of compensation for restricted share grants requires estimation of employee turn-over and forfeiture rates. Market and Performance-Based Restricted Stock and Performance-Based Restricted Stock Units. We grant restricted stock and restricted stock units subject to market or performance conditions that vest based on the satisfaction of the conditions of the award. The fair market values of market condition-based awards are determined using the Monte Carlo simulation method. The Monte Carlo simulation method is subject to variability as several factors utilized must be estimated, including the derived service period, which is estimated based on our judgment of likely future performance and our stock price volatility. The fair value of performance-based awards is determined using the market closing price on the grant date. Derived service periods and the periods charged with compensation expense for performance-based awards are estimated based on our judgment of likely future performance and may be adjusted in future periods depending on actual performance. Deferred Compensation Plan. Effective as of January 1, 2013, we initiated the Cyberonics, Inc. Nonqualified Deferred Compensation Plan (the “Deferred Compensation Plan”), which is an arrangement intended to be exempt from the requirements of Title I of the Employee Retirement Income Security Act of 1974 and in compliance with Section 409A of the IRC. As part of our overall compensation program, the Deferred Compensation Plan provides a certain group of senior management employees an opportunity to defer up to 50% of their annual base salary and commissions and 100% of their bonus or performance-based compensation until the earlier of (i) termination of employment or (ii) an elected distribution date. The liability for compensation deferred under this plan is included with “Long-term liabilities” on our consolidated balance sheet. We manage the risk of changes in the fair value of the liability for our Deferred Compensation Plan with investments in mutual funds that substantially match the investment selections of our employees. The investments are included with “Other Long-Term Assets” on our consolidated balance sheet. Changes in our liabilities under the Deferred Compensation Plan are offset by the change in the fair value of our investments, with the net change included in our consolidated statement of income under “Selling, General and Administrative” expenses. Income Taxes. We are subject to federal, state and foreign income taxes, and we use significant judgment and estimates in accounting for our income taxes. We recognize deferred tax assets and liabilities for the anticipated future tax effects of temporary differences between the financial statements basis and the tax basis of our assets and liabilities, which are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Income tax expense compared to pre-tax income yields an effective tax rate. Actual tax expense may significantly differ from our expectations if, for example, judicial interpretations of tax law or tax rates change. We periodically assess the recoverability of our deferred tax assets by considering whether it is more likely than not that some or all of the actual benefit of those assets will be realized. To the extent that realization does not meet the “more-likely-than-not” criterion, we establish a valuation allowance. We periodically review the adequacy and necessity of the valuation allowance by considering significant positive and negative evidence relative to our ability to recover deferred tax assets and to determine the timing and amount of valuation allowance that should be released. This evidence includes: a) profitability in the most recent fiscal years, b) internal forecasts for the current and next two future fiscal years, c) size of deferred tax asset relative to estimated profitability, d) the potential effects on future profitability from increasing competition, healthcare reforms and overall economic conditions, e) limitations and potential limitations on the use of our net operating losses due to ownership changes, pursuant to Internal Revenue Code (“IRC”) Section 382, and f) the implementation of prudent and feasible tax planning strategies, if any. Projecting future taxable income requires significant judgment about the trend and nature of our sales and operating expenses, which include an evaluation of the potential effects of new markets, changing technology, patent protection, governmental and private insurance reimbursement trends and regulatory trends. Our estimates of factors relevant to the recoverability of our deferred tax assets are consistent with the plans and estimates we are using to manage the underlying businesses. Vesting or exercise of restricted stock, restricted stock units and stock options result in a difference between the federal income tax deduction and the financial statement stock-based compensation, which creates an excess tax benefit (windfall) or tax deficiency (shortfall). If a windfall benefit can be utilized to reduce income taxes payable as determined using a “with and without” method, the windfall benefit will offset the shortfall deficiency; if not, then the shortfall is recognized as a discrete item in the quarter in which it occurs. Prior to fiscal year 2013, we were unable to offset shortfalls with windfalls and were required to recognize shortfalls as a discrete tax expense in the quarter in which they occurred. For fiscal year 2013, the utilization of windfall benefits offset income taxes payable and shortfalls had no impact on the effective tax rate. The realized excess tax benefits were credited to additional paid-in capital and are not recorded as a tax benefit in the consolidated statement of income. We classify our deferred tax assets as current or noncurrent based on the classification of the related asset or liability for financial reporting giving rise to the temporary difference. A deferred tax asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to net operating losses, is classified according to the expected reversal date. Tax authorities may disagree with certain positions we have taken and assess additional taxes. We regularly assess the likely outcomes of our tax positions in order to determine the appropriateness of our reserves for uncertain tax positions. We record interest and penalties related to our uncertain tax positions and record interest in Interest Expense in the consolidated statement of income and record penalties in Sales, General and Administrative expenses in the consolidated statement of income. However, there can be no assurance that we will accurately predict the outcome of tax audits and the actual outcome of an audit could have a material impact on our consolidated statements of income, balance sheets or cash flows. We are subject to income tax examinations for our U.S. federal income taxes, non-U.S. income taxes and state and local income taxes for fiscal year 1992 and subsequent years, with certain exceptions. During the 13 weeks ended October 26, 2012, we finalized the Internal Revenue Service (“IRS”) audit in connection with our fiscal years ended April 24, 2009 and April 30, 2010. The audit adjustments did not materially impact our consolidated statements of income, balance sheets or cash flows. In addition, during the 52 weeks ended April 26, 2013, we were notified that our European subsidiary, Cyberonics Europe BVBA, was under examination by the Belgium tax authority with respect to transfer pricing for fiscal years 2011 and 2010. We are unable to assess the impact this examination may have on our consolidated financial statements, on our cumulative Belgium losses through fiscal year end April 27, 2012 of €25.7 million and on our U.S. tax position. We have not provided U.S. income taxes on our undistributed earnings from our foreign subsidiaries as of April 26, 2013. These earnings, while not material to our consolidated statement of income, are intended to be permanently reinvested outside the United States.. Comprehensive Income and Foreign Currency Translations. Comprehensive income refers to net income plus revenues, expenses, gains, and losses that are included in comprehensive income but excluded from net income. Our comprehensive income differs from our net income because of the change in the cumulative foreign currency translation adjustment associated with the translation of our foreign subsidiary financial statements to U.S. dollars from their euro functional currency. Income Per Share. Accounting standards require dual presentation of earnings per share (“EPS”): basic EPS and diluted EPS. Basic EPS is computed by dividing net earnings applicable to participating securities by the weighted average number of participating securities outstanding for the period. Diluted EPS includes the effect of potentially dilutive instruments. See “Note 16. Income per Share” for additional information. Derivatives and Hedges. We are exposed to certain foreign currency risks relating to our ongoing business operations. We may, from time to time, enter into foreign currency forward derivative contracts to offset foreign currency exchange risk. We do not enter into forward exchange derivative contracts for speculative purposes. We choose not to offset all foreign currency exchange exposures for a variety of reasons, including but not limited to immateriality, accounting considerations and the prohibitive economic cost of offsetting particular exposures. There can be no assurance that a foreign currency derivative will offset more than a portion of the financial impact resulting from movements in foreign currency exchange rates. We designate foreign currency forward contracts as non-hedge derivative instruments. The foreign currency exchange gains and losses generated by our derivatives and our foreign currency denominated assets and liabilities are included in Other Expense, Net in our consolidated statement of income. Leases. We account for leases that transfer substantially all of the benefits and risks incident to the ownership of property as an acquisition of an asset and the incurrence of an obligation, and we account for all other leases as operating leases. We are a party to contracts of leased facilities and other lease obligations, all of which we consider operating leases. Certain of our leases provide for tenant improvement allowances that are recorded as deferred rent and amortized, using the straight-line method, as a reduction to rent expense over the term of the lease. Scheduled rent increases and rent holidays are recognized on a straight-line basis over the term of the lease.

Note 1. Summary of Significant Accounting Policies and Related Data

Nature of Operations. We are a medical device company incorporated in 1987, engaged in the design, development, sales and marketing of implantable medical devices that deliver a unique therapy, vagus nerve stimulation (“VNS”) therapy (“VNS Therapy®”), using pulsed electrical signals applied to the vagus nerve for the treatment of refractory epilepsy and treatment-resistant depression (“TRD”). We are focused on creating new markets, improving our products, developing new medical devices for patients with epilepsy and expanding our business into other neuroscience opportunities. We are headquartered in Houston, Texas, and are approved to market the VNS Therapy System in more than 72 countries worldwide. To date more than an estimated 82,000 patients have been implanted with the device.

In 2001, we obtained regulatory approval for commercial distribution of the VNS Therapy System for the treatment of depression in the European market and in Canada. In July 2005, the U.S. Food and Drug Administration (“FDA”) approved the VNS Therapy System as an adjunctive long-term treatment of chronic or recurrent depression for patients 18 years of age or older who are experiencing a major depressive episode and have not had an adequate response to four or more adequate antidepressant treatments. In May 2007, CMS concluded that Medicare coverage is not available for VNS Therapy as a treatment for TRD. As a result of new clinical evidence, including the completion of a post-approval dosing study and publication in four peer-reviewed journals, we recently submitted a formal request to CMS for reconsideration of its determination and requested coverage for VNS Therapy for TRD for a sub-population of Medicare beneficiaries that is estimated to represent approximately 0.2% of CMS’s patient population. CMS declined our request for reconsideration on May 28, 2013. We plan to evaluate options for appealing this decision and to work with other interested parties to continue to pursue access to VNS Therapy for patients experiencing TRD.

Fiscal Year-End. We utilize a 52/53-week fiscal year that ends the last Friday in April. Our fiscal years 2013, 2012 and 2011, which ended April 26, 2013, April 27, 2012 and April 29, 2011, respectively, were 52-week years.

Basis of Presentation. We have adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S.”) (“U.S. GAAP”).

Use of Estimates. The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in such financial statements and accompanying notes. These estimates are based on management's best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, useful lives for depreciation of plant and equipment, valuation of intangible asset investments, amortization of intangible assets, deferred tax assets and liabilities and uncertain income tax positions and stock-based compensation. Actual results could differ materially from those estimates.

Consolidation. The accompanying consolidated financial statements include Cyberonics, Inc. and our wholly-owned subsidiaries: Cyberonics Europe BVBA/SPRL (“Cyberonics Europe BVBA”), Cyberonics France Sarl, Cyberonics Holdings LLC, CYBX Netherlands C.V., Cyberonics Spain, S.L. and Cyberonics Latam, S.R.L. All significant intercompany accounts and transactions have been eliminated.

Cash and Cash Equivalents. Our cash and cash equivalents consist of highly liquid investments with a maturity of three months or less at the time of purchase.

Accounts Receivable. Our accounts receivable consists of trade receivables resulting from the granting of credit to our direct customers and distributors in the normal course of business. We maintain an allowance for doubtful accounts for potential credit losses based on our estimates of the ability of customers to make required payments, historical credit experience and expected future trends. We write off uncollectible accounts against the allowance when all reasonable collection efforts have been exhausted.

Inventories. We state our inventories at the lower of cost, using the first-in first-out (“FIFO”) method, or market. Our calculation of cost includes the acquisition cost of raw materials and components, direct labor and overhead.

Property, Plant and Equipment. Property, plant and equipment (“PP&E”) are carried at cost, less accumulated depreciation. Maintenance, repairs and minor replacements are charged to expense as incurred; significant renewals and betterments are capitalized. We compute depreciation using the straight-line method over estimated useful lives ranging from three to nine years, except for the building and building improvements. PP&E are reviewed for impairment indicators every reporting period.

Acquisition of our Building. During the fiscal year ended April 27, 2012, we acquired the land and building in which we headquarter our operations in Houston, Texas for a purchase price of $11.7 million. A portion of the building was leased to tenants other than ourselves, and therefore the acquisition was accounted for using the acquisition method under Business Combination accounting rules. Under the acquisition method, an acquirer is required to recognize and measure the identifiable assets acquired and the liabilities assumed at their fair market values as of the acquisition date and to record identifiable intangible assets at fair value, including identifiable intangibles associated with the in-place leases at the acquisition date. We determined that the values of in-place leases were immaterial and therefore no separate intangible assets were recorded. Based on independent appraisals, we determined the purchase price approximated the fair value of the land, the building and the leasehold improvements; therefore, no bargain purchase or goodwill was recognized on acquisition. The land has an indefinite life and the building is depreciated over a 39-year life. Capital improvements to the building are added as building components and depreciated over the useful life of the improvement or the building, whichever is less. The depreciation period of the leasehold improvements that existed at the time of the building purchase was adjusted to a useful life of seven years starting in September 2011.

Intangible Assets. Intangible assets, as shown on the consolidated balance sheets, consisted of developed technology rights, license agreements and other intangible assets. These assets relate primarily to seizure detection, wireless communication, rechargeable battery technology, external charging accessory hardware and associated software, an implantable lead with magnetic resonance imaging (“MRI”) compatibility and micro-processor technologies. We amortize our intangible assets on a straight-line basis over the useful life of the asset. Our estimates of useful life of intangible assets is based on the relevancy of the technology to our research and development efforts and to our future product plans. Amortization is charged to research and development until product commercialization, at which point cost of goods sold would be charged. We evaluate our intellectual property each reporting period to determine whether events and circumstances indicate either a different amortization period or impairment. If we change our estimate of the useful lives of our intellectual property, we amortize the carrying amount over the revised remaining useful life. If we identify an impairment indicator, such as an asset that no longer factors into our product commercialization plans, we test the intellectual property for recoverability, and if the carrying amount is not recoverable and exceeds its fair value, impairment is recognized and charged to research and development.

Investments

Short-term investments. Our short-term investments are carried at cost, which approximates market value, and consist of certificates of deposit with maturities ranging from six months to one year.

Long-term investments. We have invested in a convertible debt instrument and convertible preferred shares of privately-held, development-stage medical device companies. The convertible debt instrument was accounted for at fair value as an available-for-sale debt security. The convertible preferred shares are accounted for under the cost method. We own less than 20% of the equity in these entities and do not have the ability to exercise significant influence over the investee. We review the equity investments for events or circumstances that indicate a significant adverse effect on their fair value. If we identify events or changes in circumstances that indicate a decrease in value of the equity investments that is other-than-temporary we recognize a loss.

Revenue Recognition.

Product Revenue: We sell our products through a direct sales force in the U.S. and a combination of direct sales representatives and independent distributors in international markets. Management maintains policies for sales returns and exchanges in order to control returns and exchanges. We recognize revenue when title to the goods and risk of loss transfers to customers or our independent distributors. We estimate expected sales returns based on historical data and record a reduction of sales with a return reserve when we sell the product.

License Revenue:We amortize upfront payments received under license agreements over the life of our obligations under the agreements to prosecute the licensed patent applications. Effective December 17, 2007, we entered into an agreement granting an exclusive license to certain patents and patent applications pertaining to weight reduction, hypertension and diabetes in exchange for an up-front, non-refundable payment of $9.5 million, plus a royalty on future commercial sales of any product covered by the licensed patents. We retain the responsibility to prosecute the licensed patent applications and estimate that our obligation to prosecute the licensed patent applications will be satisfied during the fiscal year 2014. Accordingly, we are recognizing, as license revenue, the amortization of the $9.5 million up-front payment, on a straight-line basis from the date of execution of the agreement. The unrecognized portion of the $9.5 million payment, $1.5 million at April 26, 2013, was included in Other Long-Term Liabilities in our consolidated balance sheet.

Medical Device Excise Tax (“MDET”). Section 4191 of the Internal Revenue Code enacted by the Health Care and Education Reconciliation Act of 2010, in conjunction with the Patient Protection and Affordable Care Act, established a 2.3% excise tax on medical devices sold domestically beginning on January 1, 2013. We account for the MDET in cost of sales. For the four months ended April 26, 2013 we included $1.2 million of MDET in cost of sales on the consolidated statement of income.

Research and Development (R&D). All R&D costs are expensed as incurred. R&D costs include costs of all basic research activities, as well as engineering and technical effort required to develop a new product or make significant improvement to an existing product or manufacturing process. R&D costs also include regulatory, clinical trial expenses and the amortization of purchased intellectual property utilized in R&D projects.

Stock-Based Compensation

Stock-Based Incentive Awards. We grant stock-based incentive awards to directors, officers, key employees and consultants on four pre-determined days during each fiscal year. We measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair market value of the award. We recognize equity-based compensation expense ratably over the period that an employee is required to provide service in exchange for the award (vesting period). We issue new shares upon share option exercise, vesting of a restricted share unit or the award of restricted stock.

Stock Options. Options granted under the Stock Plans are service-based and typically vest annually over four or five years, or cliff-vest in one to three years, following their date of grant as required under the applicable agreement establishing the award and have maximum terms of 10 years. Stock option grant prices are set equal to the closing price of our common stock on the day of the grant. There are no post-vesting restrictions on the shares issued. We use the Black-Scholes option pricing methodology to calculate the grant date fair market value of stock option awards. This methodology takes into account variables such as the future expected volatility of our stock price, the amount of time expected to elapse between the date of grant and the date of exercise and a risk-free interest rate. Compensation cost is expensed ratably over the service period.

Restricted Stock and Restricted Stock Units. We grant restricted stock and restricted stock units at no purchase cost to the grantee. Unvested restricted stock entitles the grantees to dividends, if any, and voting rights for their respective shares. Sale or transfer of the shares and share units are restricted until they are vested. We issue new shares for our restricted stock and restricted stock unit awards. Under our stock-based compensation plans we repurchase a portion of these shares from our employees to permit our employees to meet their minimum statutory tax withholding requirements on vesting of their restricted stock, unless the employee opts for cash settlement of taxes. Under this plan we expect to repurchase, and place in treasury, as many as 58,819 shares during fiscal year 2014.

Service-Based Restricted Stock and Restricted Stock Units. The fair market value of serviced-based restricted stock and restricted stock units are determined using the market closing price on the grant date, and compensation is expensed ratably over the vesting period. Calculation of compensation for restricted share grants requires estimation of employee turn-over and forfeiture rates.

Market and Performance-Based Restricted Stock and Performance-Based Restricted Stock Units. We grant restricted stock and restricted stock units subject to market or performance conditions that vest based on the satisfaction of the conditions of the award. The fair market values of market condition-based awards are determined using the Monte Carlo simulation method. The Monte Carlo simulation method is subject to variability as several factors utilized must be estimated, including the derived service period, which is estimated based on our judgment of likely future performance and our stock price volatility. The fair value of performance-based awards is determined using the market closing price on the grant date. Derived service periods and the periods charged with compensation expense for performance-based awards are estimated based on our judgment of likely future performance and may be adjusted in future periods depending on actual performance.

Deferred Compensation Plan. Effective as of January 1, 2013, we initiated the Cyberonics, Inc. Nonqualified Deferred Compensation Plan (the “Deferred Compensation Plan”), which is an arrangement intended to be exempt from the requirements of Title I of the Employee Retirement Income Security Act of 1974 and in compliance with Section 409A of the IRC. As part of our overall compensation program, the Deferred Compensation Plan provides a certain group of senior management employees an opportunity to defer up to 50% of their annual base salary and commissions and 100% of their bonus or performance-based compensation until the earlier of (i) termination of employment or (ii) an elected distribution date. The liability for compensation deferred under this plan is included with “Long-term liabilities” on our consolidated balance sheet. We manage the risk of changes in the fair value of the liability for our Deferred Compensation Plan with investments in mutual funds that substantially match the investment selections of our employees. The investments are included with “Other Long-Term Assets” on our consolidated balance sheet. Changes in our liabilities under the Deferred Compensation Plan are offset by the change in the fair value of our investments, with the net change included in our consolidated statement of income under “Selling, General and Administrative” expenses.

Income Taxes. We are subject to federal, state and foreign income taxes, and we use significant judgment and estimates in accounting for our income taxes. We recognize deferred tax assets and liabilities for the anticipated future tax effects of temporary differences between the financial statements basis and the tax basis of our assets and liabilities, which are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Income tax expense compared to pre-tax income yields an effective tax rate. Actual tax expense may significantly differ from our expectations if, for example, judicial interpretations of tax law or tax rates change.

We periodically assess the recoverability of our deferred tax assets by considering whether it is more likely than not that some or all of the actual benefit of those assets will be realized. To the extent that realization does not meet the “more-likely-than-not” criterion, we establish a valuation allowance. We periodically review the adequacy and necessity of the valuation allowance by considering significant positive and negative evidence relative to our ability to recover deferred tax assets and to determine the timing and amount of valuation allowance that should be released. This evidence includes: a) profitability in the most recent fiscal years, b) internal forecasts for the current and next two future fiscal years, c) size of deferred tax asset relative to estimated profitability, d) the potential effects on future profitability from increasing competition, healthcare reforms and overall economic conditions, e) limitations and potential limitations on the use of our net operating losses due to ownership changes, pursuant to Internal Revenue Code (“IRC”) Section 382, and f) the implementation of prudent and feasible tax planning strategies, if any. Projecting future taxable income requires significant judgment about the trend and nature of our sales and operating expenses, which include an evaluation of the potential effects of new markets, changing technology, patent protection, governmental and private insurance reimbursement trends and regulatory trends. Our estimates of factors relevant to the recoverability of our deferred tax assets are consistent with the plans and estimates we are using to manage the underlying businesses.

Vesting or exercise of restricted stock, restricted stock units and stock options result in a difference between the federal income tax deduction and the financial statement stock-based compensation, which creates an excess tax benefit (windfall) or tax deficiency (shortfall). If a windfall benefit can be utilized to reduce income taxes payable as determined using a “with and without” method, the windfall benefit will offset the shortfall deficiency; if not, then the shortfall is recognized as a discrete item in the quarter in which it occurs. Prior to fiscal year 2013, we were unable to offset shortfalls with windfalls and were required to recognize shortfalls as a discrete tax expense in the quarter in which they occurred. For fiscal year 2013, the utilization of windfall benefits offset income taxes payable and shortfalls had no impact on the effective tax rate. The realized excess tax benefits were credited to additional paid-in capital and are not recorded as a tax benefit in the consolidated statement of income.

We classify our deferred tax assets as current or noncurrent based on the classification of the related asset or liability for financial reporting giving rise to the temporary difference. A deferred tax asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to net operating losses, is classified according to the expected reversal date.

Tax authorities may disagree with certain positions we have taken and assess additional taxes. We regularly assess the likely outcomes of our tax positions in order to determine the appropriateness of our reserves for uncertain tax positions. We record interest and penalties related to our uncertain tax positions and record interest in Interest Expense in the consolidated statement of income and record penalties in Sales, General and Administrative expenses in the consolidated statement of income. However, there can be no assurance that we will accurately predict the outcome of tax audits and the actual outcome of an audit could have a material impact on our consolidated statements of income, balance sheets or cash flows.

We are subject to income tax examinations for our U.S. federal income taxes, non-U.S. income taxes and state and local income taxes for fiscal year 1992 and subsequent years, with certain exceptions.

During the 13 weeks ended October 26, 2012, we finalized the Internal Revenue Service (“IRS”) audit in connection with our fiscal years ended April 24, 2009 and April 30, 2010. The audit adjustments did not materially impact our consolidated statements of income, balance sheets or cash flows.

In addition, during the 52 weeks ended April 26, 2013, we were notified that our European subsidiary, Cyberonics Europe BVBA, was under examination by the Belgium tax authority with respect to transfer pricing for fiscal years 2011 and 2010. We are unable to assess the impact this examination may have on our consolidated financial statements, on our cumulative Belgium losses through fiscal year end April 27, 2012 of €25.7 million and on our U.S. tax position.

We have not provided U.S. income taxes on our undistributed earnings from our foreign subsidiaries as of April 26, 2013. These earnings, while not material to our consolidated statement of income, are intended to be permanently reinvested outside the United States..

Comprehensive Income and Foreign Currency Translations. Comprehensive income refers to net income plus revenues, expenses, gains, and losses that are included in comprehensive income but excluded from net income. Our comprehensive income differs from our net income because of the change in the cumulative foreign currency translation adjustment associated with the translation of our foreign subsidiary financial statements to U.S. dollars from their euro functional currency.

Income Per Share. Accounting standards require dual presentation of earnings per share (“EPS”): basic EPS and diluted EPS. Basic EPS is computed by dividing net earnings applicable to participating securities by the weighted average number of participating securities outstanding for the period. Diluted EPS includes the effect of potentially dilutive instruments. See “Note 16. Income per Share” for additional information.

Derivatives and Hedges. We are exposed to certain foreign currency risks relating to our ongoing business operations. We may, from time to time, enter into foreign currency forward derivative contracts to offset foreign currency exchange risk. We do not enter into forward exchange derivative contracts for speculative purposes. We choose not to offset all foreign currency exchange exposures for a variety of reasons, including but not limited to immateriality, accounting considerations and the prohibitive economic cost of offsetting particular exposures. There can be no assurance that a foreign currency derivative will offset more than a portion of the financial impact resulting from movements in foreign currency exchange rates. We designate foreign currency forward contracts as non-hedge derivative instruments. The foreign currency exchange gains and losses generated by our derivatives and our foreign currency denominated assets and liabilities are included in Other Expense, Net in our consolidated statement of income.

Leases. We account for leases that transfer substantially all of the benefits and risks incident to the ownership of property as an acquisition of an asset and the incurrence of an obligation, and we account for all other leases as operating leases. We are a party to contracts of leased facilities and other lease obligations, all of which we consider operating leases. Certain of our leases provide for tenant improvement allowances that are recorded as deferred rent and amortized, using the straight-line method, as a reduction to rent expense over the term of the lease. Scheduled rent increases and rent holidays are recognized on a straight-line basis over the term of the lease.