Abercrombie & Fitch 2011 Annual Report Download - page 77

ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2010, respectively. The Company also recognized $19.2 million, $14.7 million and $12.8 million in tax
benefits related to share-based compensation for the fifty-two week periods ended January 28,
2012, January 29, 2011 and January 30, 2010, respectively.
The fair value of share-based compensation awards is recognized as compensation expense on a
straight-line basis over the awards’ requisite service period, net of forfeitures. For awards that are expected
to result in a tax deduction, a deferred tax asset is recorded in the period in which share-based
compensation expense is recognized. A current tax deduction arises upon the vesting of restricted stock
units or the exercise of stock options and stock appreciation rights and is principally measured at the
award’s intrinsic value. If the tax deduction is greater than the recorded deferred tax asset, the tax benefit
associated with any excess deduction is considered a “windfall tax benefit” and is recognized as additional
paid-in capital. If the tax deduction is less than the recorded deferred tax asset, the resulting difference, or
shortfall, is first charged to additional paid-in capital, to the extent of the pool of “windfall tax benefits,”
with any remainder recognized as tax expense. The Company’s pool of “windfall tax benefits” as of
January 28, 2012, is sufficient to fully absorb any shortfall which may develop associated with awards
currently outstanding.
Share-based compensation expense is recognized, net of estimated forfeitures, over the requisite
service period on a straight-line basis. The Company adjusts share-based compensation expense on a
quarterly basis for actual forfeitures and for changes to the estimate of expected award forfeitures based on
actual forfeiture experience. The effect of adjusting the forfeiture rate is recognized in the period the
forfeiture estimate is changed. The effect of adjustments for forfeitures during the fifty-two week period
ended January 28, 2012 was $1.6 million. The effect of adjustments for forfeitures during the fifty-two
week period ended January 29, 2011 was $4.5 million.
A&F issues shares of Common Stock for stock option and stock appreciation right exercises and
restricted stock unit vestings from treasury stock. As of January 28, 2012, A&F had sufficient treasury
stock available to settle stock options, stock appreciation rights and restricted stock units outstanding
without having to repurchase additional shares of Common Stock. Settlement of stock awards in Common
Stock also requires that the Company has sufficient shares available in stockholder-approved plans at the
applicable time.
In the event, at each reporting date during which share-based compensation awards remain
outstanding, there are not sufficient shares of Common Stock available to be issued under the 2007
Amended and Restated Long-Term Incentive Plan (the “2007 LTIP”), or under a successor or replacement
plan, the Company may be required to designate some portion of the outstanding awards to be settled in
cash, which would result in liability classification of such awards. The fair value of liability-classified
awards is re-measured each reporting date until such awards no longer remain outstanding or until
sufficient shares of Common Stock become available to be issued under the 2007 LTIP, or under a
successor or replacement plan. As long as the awards are required to be classified as a liability, the change
in fair value would be recognized in current period expense based on the requisite service period rendered.
Plans
As of January 28, 2012, A&F had two primary share-based compensation plans: the 2005 Long-Term
Incentive Plan (the “2005 LTIP”), under which A&F grants stock options, stock appreciation rights and
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