Chili's 2008 Annual Report Download - page 44

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Stock Based Compensation
Statement of Financial Accounting Standards (‘‘SFAS’’) No. 123 (Revised 2004), ‘‘Share-Based
Payment,’’ (‘‘SFAS 123R’’), requires the measurement and recognition of compensation cost at fair value
for all share-based payments, including stock options. We determine the fair value of our stock option
awards using the Black-Scholes option valuation model. The Black-Scholes model requires judgmental
assumptions including expected life and stock price volatility. We base our expected life assumptions on
historical experience regarding option life. Stock price volatility is calculated based on historical prices and
the expected life of the options. We determine the fair value of our performance shares using a Monte
Carlo simulation model. The Monte Carlo method is a statistical modeling technique that requires highly
judgmental assumptions regarding Brinker’s future operating performance compared to our plan
designated peer group in the future. The simulation is based on a probability model and market-based
inputs that are used to predict future stock returns. We use the historical operating performance and
correlation of stock performance to the S&P 500 composite index of Brinker and our peer group as inputs
to the simulation model. These historical returns could differ significantly in the future and as a result, the
fair value assigned to the performance shares could vary significantly to the final payout. We believe the
Monte Carlo simulation model provides the best evidence of fair value at the grant date and is an
appropriate technique for valuing share-based awards under SFAS 123R. SFAS 123R also requires that we
recognize compensation expense for only the portion of share-based awards that are expected to vest.
Therefore, we apply estimated forfeiture rates that are derived from our historical forfeitures of similar
awards.
Income Taxes
In determining net income for financial statement purposes, we make certain estimates and judgments
in the calculation of tax expense and the resulting tax liabilities and in the recoverability of deferred tax
assets that arise from temporary differences between the tax and financial statement recognition of
revenue and expense. When considered necessary, we record a valuation allowance to reduce deferred tax
assets to a balance that is more likely than not to be recognized. We use an estimate of our annual effective
tax rate at each interim period based on the facts and circumstances available at that time while the actual
effective tax rate is calculated at year-end.
In the ordinary course of business, there may be many transactions and calculations where the
ultimate tax outcome is uncertain. Effective June 28, 2007, we adopted the provisions of FIN 48. The
adoption of this standard was consistent with FSP FIN 48-1, ‘‘Definition of Settlement in FASB
Interpretation No. 48’’, that was issued in May 2007 and that provides guidance on how to determine
whether a tax position is effectively settled for the purpose of recognizing unrecognized tax benefits.
In addition to the risks related to the effective tax rate described above, the effective tax rate reflected
in forward-looking statements is based on current tax law. Any significant changes in the tax laws could
affect these estimates.
Property and Equipment
Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the
assets. The useful lives of the assets are based upon our expectations for the period of time that the asset
will be used to generate revenues. We periodically review the assets for changes in circumstances, which
may impact their useful lives.
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