Lumber Liquidators 2007 Annual Report Download - page 61

Stock-Based Compensation
The Company adopted the provisions of Statement of Financial Accounting Standards (or “SFAS”) No. 123
(revised in 2004), “Share-Based Payment” (or “SFAS 123(R)”), using the prospective-transition method effective
January 1, 2006. Prior to the adoption of SFAS 123(R), the Company used the intrinsic value method under the
provisions of Accounting Principles Board Opinion No. 25 (or “APB 25”). There were no material differences in
the calculations of the Company’s stock-based compensation expense under APB 25 and SFAS 123,
“Accounting for Stock-Based Compensation” in 2005.
The Company issues incentive awards in the form of stock options and restricted stock awards to employees
and non-employee directors. The Company recognizes expense for its stock-based compensation based on the
fair value of the awards that are granted. Measured compensation cost is recognized ratably over the requisite
service period of the related stock-based compensation award.
Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes” (or
“SFAS 109”). Income taxes are provided for under the asset and liability method and consider differences
between the tax and financial accounting bases. The tax effects of these differences are reflected on the balance
sheet as deferred income taxes and valued using the effective tax rate expected to be in effect when the
differences reverse. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is
more likely than not that some portion of the deferred tax asset will not be realized. In evaluating the need for a
valuation allowance, the Company took into account various factors, including the expected level of future
taxable income. If actual results differ from the assumptions made in the evaluation of the valuation allowance, a
change in the valuation allowance will be recorded through income tax expense in the period such determination
is made.
Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (or “FASB”)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (or “FIN 48”). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with
SFAS 109. FIN 48 describes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and
transition. The adoption of FIN 48 did not have a material effect on the Company’s financial position or results
of operations.
Net Income per Common Share
Basic net income per common share is determined by dividing net income by the weighted average number
of common shares outstanding during the year. Diluted net income per common share is determined by dividing
net income by the weighted average number of common shares outstanding during the year, plus the dilutive
effect of common share equivalents, such as stock options, warrants and preferred stock. Common shares and
common share equivalents included in the computation represent shares issuable upon assumed exercise of
outstanding stock options and warrants and the conversion of redeemable convertible preferred stock, except
when the effect of their inclusion would be antidilutive.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (or “SFAS 157”), which
defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is
permitted. The Company is currently evaluating the impact of this pronouncement on its financial statements.
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