Abercrombie & Fitch 2011 Annual Report Download - page 59

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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 2011.
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.
During Fiscal 2011, the Company granted stock
appreciation rights covering an aggregate of
2,252,895 shares and no stock options. A 10%
increase in the expected term would have yielded
a 4% increase in the Black-Scholes valuation for
stock appreciation rights granted during the year,
while a 10% increase in stock price volatility
would have yielded a 9% increase in the Black-
Scholes valuation for stock appreciation rights
granted during the year.
56