IHOP 2009 Annual Report Download - page 107

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
For more information on the financial instruments the Company measures at fair value, see
Note 11, Fair Value Measurements.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. 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 U.S. GAAP governing the
accounting for contingencies. The Company records estimated tax liabilities to the extent the
contingencies are probable and can be reasonably estimated.
Effective January 1, 2007, the Company adopted U.S. GAAP governing the determination of how
tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial
statements. The Company recognizes 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
upon adoption 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 and non-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.
U.S. GAAP 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
requirement of U.S. GAAP and the SEC, the fair values generated by the model may not be indicative
of the actual fair values of the Company’s awards, as it does not consider other factors important to
those stock-based payment awards, such as continued employment, periodic vesting requirements and
limited transferability.
The Company accounts for option grants to non-employees in accordance with U.S. GAAP,
whereby the fair value of such options is determined using the Black-Scholes option pricing model at
the earlier of the date at which the non-employee’s performance is complete or a performance
commitment is reached.
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