Cardinal Health 2015 Annual Report Download - page 23

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MD&A Critical Accounting Policies and Sensitive Accounting Estimates
Cardinal Health | Fiscal 2015 Form 10-K 22
allowances, we do not anticipate any limitations on our use of any of
the other net deferred income tax assets described above.
We believe that our estimates for the valuation allowances against
deferred tax assets and unrecognized tax benefits are appropriate
based on current facts and circumstances. However, others applying
reasonable judgment to the same facts and circumstances could
develop different estimates. The amount we ultimately pay when
matters are resolved may differ from the amounts accrued.
Tax benefits from uncertain tax positions are recognized when it is
more likely than not that the position will be sustained upon
examination of the technical merits of the position, including
resolutions of any related appeals or litigation processes. The amount
recognized is measured as the largest amount of tax benefit that is
greater than 50 percent likely of being realized upon settlement. See
Note 8 of the “Notes to Consolidated Financial Statements” for
additional information regarding unrecognized tax benefits.
If any of our assumptions or estimates were to change, an increase
or decrease in our effective income tax rate by 1 percent would have
caused income tax expense to increase or decrease $20 million for
fiscal 2015.
Share-Based Compensation
Share-based compensation to employees is recognized in the
consolidated statements of earnings based on the grant date fair
value of the awards. The fair value of restricted share units and
performance share units is determined by the grant date market price
of our common shares. The compensation expense associated with
nonvested performance share units is dependent on our periodic
assessment of the probability of the targets being achieved and our
estimate, which may vary over time, of the number of shares that
ultimately will be issued. The fair value of stock options is determined
using a lattice valuation model. We believe the lattice model provides
reasonable estimates because it has the ability to take into account
employee exercise patterns based on changes in our stock price and
other variables and it provides for a range of input assumptions.
We analyze historical data to estimate option exercise behaviors and
post-vesting forfeitures to be used within the lattice model. The
expected life of the options granted is calculated from the option
valuation model and represents the length of time in years that the
options granted are expected to be outstanding. Expected volatilities
are based on implied volatility from traded options on our common
shares and historical volatility over a period of time commensurate
with the contractual term of the option grant (up to ten years). As
required, the forfeiture estimates are adjusted to reflect actual
forfeitures when an award vests. The actual forfeitures in future
reporting periods could be higher or lower than our current estimates.
See Note 16 of the "Notes to Consolidated Financial Statements" for
additional information regarding share-based compensation.