Pep Boys 2012 Annual Report Download - page 72

determine the fair value of our stock options at the date of the grant using the Black-Scholes
option-pricing model. The RSUs are awarded at a price equal to the market price of our
underlying stock on the date of the grant. In situations where we have granted stock options and
RSUs with market conditions, we have used Monte Carlo simulations in estimating the fair value
of the award. The pricing model and generally accepted valuation techniques require
management to make assumptions and to apply judgment to determine the fair value of our
awards. These assumptions and judgments include the expected life of stock options, expected
stock price volatility, future employee stock option exercise behaviors and the estimate of award
forfeitures. We do not believe there is a reasonable likelihood that there will be a material
change in the future estimates or assumptions we use to determine stock-based compensation
expense. However, if actual results are different from these assumptions, the share-based
compensation expense reported in our financial statements may not be representative of the
actual economic cost of the share-based compensation. In addition, significant changes in these
assumptions could materially impact our share-based compensation expense on future awards. A
10% change in our share-based compensation expense for fiscal 2012 would have affected net
earnings by approximately $0.1 million.
• We are required to estimate our income taxes in each of the jurisdictions in which we operate.
This requires us to estimate our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as depreciation of property and
equipment and valuation of inventories, for tax and accounting purposes. We determine our
provision for income taxes based on federal and state tax laws and regulations currently in
effect. Legislation changes currently proposed by certain states in which we operate, if enacted,
could increase our transactions or activities subject to tax. Any such legislation that becomes law
could result in an increase in our state income tax expense and our state income taxes paid,
which could have a material effect on our net earnings.
At any one time our tax returns for many tax years are subject to examination by U.S. Federal,
commonwealth, and state taxing jurisdictions. For income tax benefits related to uncertain tax
positions to be recognized, a tax position must be more-likely-than-not to be sustained upon
examination by taxing authorities. The amount recognized is measured as the largest amount of
benefit that is greater than 50 percent likely of being realized upon ultimate settlement. An
uncertain income tax position will not be recognized in the financial statements unless it is
more-likely-than-not to be sustained. We adjust these tax liabilities, as well as the related interest
and penalties, based on the latest facts and circumstances, including recently published rulings,
court cases, and outcomes of tax audits. To the extent our actual tax liability differs from our
established tax liabilities for unrecognized tax benefits, our effective tax rate may be materially
impacted. While it is often difficult to predict the final outcome of, the timing of, or the tax
treatment of any particular tax position or deduction, we believe that our tax balances reflect the
more-likely-than-not outcome of known tax contingencies.
The temporary differences between the book and tax treatment of income and expenses result in
deferred tax assets and liabilities, which are included within our consolidated balance sheets. We
must then assess the likelihood that our deferred tax assets will be recovered from future taxable
income. To the extent we believe that recovery is not more-likely-than-not, we must establish a
valuation allowance. To the extent we establish a valuation allowance or change the allowance in
a future period, income tax expense will be impacted. Actual results could differ from this
assessment if adequate taxable income is not generated in future periods from either operations
or projected tax planning strategies.
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