Abercrombie & Fitch 2010 Annual Report Download - page 55

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Table of Contents
Policy Effect if Actual Results Differ from Assumptions
Income Taxes
The provision for income taxes is determined using the asset and
liability approach. Tax laws often require items to be included in
tax filings at different times than the items are being reflected in
the financial statements. A current liability is recognized for the
estimated taxes payable for the current year. Deferred taxes
represent the future tax consequences expected to occur when the
reported amounts of assets and liabilities are recovered or paid.
Deferred taxes are adjusted for enacted changes in tax rates and tax
laws. Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a tax benefit will not be
realized.
A provision for U.S. income tax has not been recorded on
undistributed profits of non-U.S. subsidiaries that the Company has
determined to be indefinitely reinvested outside the U.S.
Determination of the amount of unrecognized deferred U.S.
income tax liability on these unremitted earnings is not practicable
because of the complexities associated with this hypothetical
calculation.
The Company does not expect material changes in the
judgments, assumptions or interpretations used to calculate the
tax provision for Fiscal 2010. However, changes in these
assumptions may occur and should those changes be significant,
they could have a material impact on the Company's income tax
provision.
If the Company's intention or U.S. tax law changes in the future,
there may be a significant negative impact on the provision for
income taxes to record an incremental tax liability in the period
the change occurs.
Equity Compensation Expense
The Company's equity compensation expense related to stock
options and stock appreciation rights is estimated using the Black-
Scholes option-pricing model to determine the fair value of the
stock option and stock appreciation right grants, which requires the
Company to estimate the expected term of the stock option and
stock appreciation right grants and expected future stock price
volatility over the expected term.
The Company does not expect material changes in the near term
to the underlying assumptions used to calculate equity
compensation expense for Fiscal 2010. However, changes in
these assumptions do occur, and, should those changes be
significant, they could have a material impact on the Company's
equity compensation expense.
During Fiscal 2010, the Company issued stock-appreciation
rights and no stock options. A 10% increase in term would yield
a 3% increase in the Black-Scholes valuation for stock
appreciation rights issued during the year, while a 10% increase
in volatility would yield a 9% increase in the Black-Scholes
valuation for stock appreciation rights issued during the year.
52