Sally Beauty Supply 2011 Annual Report Download - page 83

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The amount of stock option expense is determined based on the fair value of each stock option grant,
which is estimated on the date of grant using the Black-Scholes option pricing model with the following
assumptions: expected life, volatility, risk-free interest rate and dividend yield. The expected life of stock
options represents the period of time that the stock options granted are expected to be outstanding. We
estimate the expected life based on historical exercise trends. During each of the past five years, we have
estimated expected volatility by using the average volatility of both the Company and similar companies
(based on industry sector) since it has not been practicable to estimate the Company’s expected volatility
on a stand-alone basis due to a lack of sufficient trading history. The risk-free interest rate is based on the
zero-coupon U.S. Treasury issue at the date of the grant for the expected life of the stock options. The
dividend yield represents our anticipated cash dividend over the expected life of the stock options. The
amount of stock option expense recorded is significantly affected by these estimates. In addition, we record
stock option expense based on an estimate of the total number of stock options expected to vest, which
requires us to estimate future forfeitures. We use historical forfeiture experience as a basis for this
estimate. Actual forfeitures differing from these estimates could significantly affect the timing of the
recognition of stock option expense. We have based all these estimates on our assumptions as of
September 30, 2011. Our estimates for future periods may be based on different assumptions and
accordingly may differ.
We believe that our share-based compensation expense is based on reasonable estimates and assumptions.
However, if actual results are not consistent with our estimate or assumptions, we may be exposed to
changes in share-based compensation expense that could be material. A 10% change in our share-based
compensation expense for the year ended September 30, 2011 would affect earnings by approximately
$1.0 million, net of income tax.
Recent Accounting Pronouncements
We have not yet adopted and are currently assessing any potential effect of the following pronouncements
on our consolidated financial statements:
In December 2010, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards
Update (‘‘ASU’’) No. 2010-28 which amended Accounting Standards Codification (‘‘ASC’’) Topic 350,
Intangibles-Goodwill and Other. This amendment modifies the goodwill impairment test for reporting units
with a zero or negative carrying amount, by requiring that Step 2 of the goodwill impairment test be
performed for such reporting units if it is more likely than not that an impairment of goodwill exists. For
public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2010. Early application is not permitted.
In December 2010, the FASB issued ASU No. 2010-29 which amended ASC Topic 805, Business
Combinations (‘‘ASC 805’’). This amendment requires that a public company that enters into business
combinations that are material on an individual or aggregate basis disclose certain pro forma information
for the current and the immediately preceding fiscal year. This amendment also expands the supplemental
pro forma disclosures to include a description of the nature and amount of material, non-recurring pro
forma adjustments directly attributable to such business combination or business combinations. This
amendment is effective prospectively for business combinations consummated on or after the first annual
reporting period beginning on or after December 15, 2010. Early application is permitted.
In May 2011, the FASB issued ASU No. 2011-04 which amended ASC Topic 820, Fair Value Measurements
and Disclosures (‘‘ASC 820’’). When effective, this amendment will change the title of ASC 820 to ‘‘Fair
Value Measurement’’ and will adopt fair value measurement and disclosure guidance that is generally
consistent with the corresponding International Financial Reporting Standards (‘‘IFRS’’) guidance. More
specifically, this amendment will change certain requirements for measuring fair value or for disclosing
information about fair value measurements or, alternatively, clarify the FASB’s intent about the
application of existing fair value measurement and disclosure requirements. For public companies, this
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