IHOP 2008 Annual Report Download - page 99

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DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
• Level 3 includes unobservable inputs that reflect our assumptions about the assumptions that
market participants would use in pricing the asset or liability. We develop these inputs based on
the best information available, including our own data.
For more information on the financial instruments the Company measures at fair value, see
Note 13, Fair Value Measurements.
Income Taxes
The Company utilizes the liability method of accounting for income taxes as set forth in SFAS
No. 109, Accounting for Income Taxes (‘‘SFAS 109’’). Under the liability method, deferred taxes are
determined based on the temporary differences between the financial statement and tax bases of assets
and liabilities using enacted tax rates. A valuation allowance is recorded when it is more likely than not
that some of the deferred tax assets will not be realized. The Company also determines its tax
contingencies in accordance with SFAS No. 5, Accounting for Contingencies (‘‘SFAS 5’’). The Company
records estimated tax liabilities to the extent the contingencies are probable and can be reasonably
estimated.
The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes
(‘‘FIN 48’’) on January 1, 2007. FIN 48 addresses the determination of how tax benefits claimed or
expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48,
the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than
not that the tax position will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in the financial statements from such a
position are measured based on the largest benefit that has a greater than fifty percent likelihood of
being realized upon ultimate resolution. The impact of the Company’s reassessment of its tax positions
in accordance with FIN 48 did not have a material impact on the results of operations, financial
condition or liquidity.
Stock-Based Compensation
The Company has in effect stock incentive plans under which incentive stock options have been
granted to employees and restricted stock units and non-qualified stock options have been granted to
employees and non-employee members of the Board of Directors. The Company accounts for all stock-
based payments to employees, including grants of employee stock options and restricted stock units to
be recognized in the financial statements based on their respective grant date fair values. The Company
also accounts for the benefits of tax deduction in excess of recognized compensation cost be reported
as a financing cash flow. In March 2005, the Securities and Exchange Commission (‘‘SEC’’) issued Staff
Accounting Bulletin No. 107, Share-Based Payment (‘‘SAB 107’’), which provides guidance regarding the
interaction of SFAS 123(R) and certain SEC rules and regulations. The Company has applied the
provisions of SAB 107 in its adoption of SFAS 123(R).
SFAS 123(R) requires companies to estimate the fair value of stock-based payment awards on the
date of grant using an option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense ratably over the requisite service periods. The Company has
estimated the fair value of each award as of the date of grant or assumption using the Black-Scholes
option pricing model, which considers, among other factors, the expected life of the award and the
expected volatility of the Company’ stock price. Although the Black-Scholes model meets the
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