Cracker Barrel 2008 Annual Report Download - page 49

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47
The cumulative effect of this change in accounting
principle upon adoption resulted in a net increase of
$2,898 to our beginning 2008 retained earnings.
Our estimates are made based on current tax laws, the
best available information at the time of the provision
and historical experience. We file our income tax returns
many months after our year end. These returns are
subject to audit by various federal and state governments
years after the returns are filed and could be subject
to differing interpretations of the tax laws. We then must
assess the likelihood of successful legal proceedings
or reach a settlement with the relevant taxing authority.
Although we believe that the judgments and estimates
used in establishing our tax provision are reasonable,
a successful legal proceeding or a settlement could result
in material adjustments to our Consolidated Financial
Statements and our consolidated financial position.
Share-Based Compensation
In accordance with the adoption of SFAS No. 123R, we
began recognizing share-based compensation expense in
2006. Share-based compensation cost is measured at
the grant date based on the fair value of the award and is
recognized as expense over the requisite service period.
Our policy is to recognize compensation cost for awards
with only service conditions and a graded vesting
schedule on a straight-line basis over the requisite
service period for the entire award. Additionally, our
policy is to issue new shares of common stock to satisfy
stock option exercises or grants of nonvested and
restricted shares.
The fair value of each option award granted
subsequent to July 29, 2005 was estimated on the date
of grant using a binomial lattice-based option valuation
model. This model incorporates the following ranges of
assumptions:
•
The expected volatility is a blend of implied volatility
based on market-traded options on our stock and
historical volatility of our stock over the contractual life
of the options.
•
We use historical data to estimate option exercise and
employee termination behavior within the valuation
model; separate groups of employees that have similar
historical exercise behavior are considered separately
for valuation purposes. The expected life of options
granted is derived from the output of the option valuation
model and represents the period of time the options
are expected to be outstanding.
•
The risk-free interest rate is based on the U.S. Treasury
yield curve in effect at the time of grant for periods
within the contractual life of the option.
•
The expected dividend yield is based on our current
dividend yield as the best estimate of projected
dividend yield for periods within the contractual life
of the option.
The expected volatility, option exercise and
termination assumptions involve management’s best
estimates at that time, all of which affect the fair value
of the option calculated by the binomial lattice-based
option valuation model and, ultimately, the expense that
will be recognized over the life of the option. We update
the historical and implied components of the expected
volatility assumption quarterly. We update option exercise
and termination assumptions quarterly. The expected life
is a by-product of the lattice model and is updated when
new grants are made.
SFAS No. 123R also requires that compensation
expense be recognized for only the portion of options
that are expected to vest. Therefore, an estimated
forfeiture rate derived from historical employee
termination behavior, grouped by job classification, is
applied against share-based compensation expense. The
forfeiture rate is applied on a straight-line basis over the
service (vesting) period for each separately vesting
portion of the award as if the award was, in-substance,
multiple awards. We update the estimated forfeiture rate
to actual on each of the vesting dates and adjust
compensation expense accordingly so that the amount of
compensation cost recognized at any date is at least
equal to the portion of the grant-date value of the award
that is vested at that date.
Generally, the fair value of each nonvested stock grant
is equal to the market price of our stock at the date of
grant reduced by the present value of expected dividends