Tecumseh Products 2014 Annual Report Download - page 32

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technologies and foreign currency movements, and are subject to a high degree of judgment and complexity. All of these
variables ultimately affect management's estimate of the expected future cash flows to be derived from the asset or group of
assets under evaluation, as well as the estimate of their fair value. Changes in the assumptions and estimates, or our inability to
achieve our business plan, may affect the carrying value of long-lived assets and could result in additional impairment charges
in future periods.
Share-based Compensation
Share-based payment awards exchanged for employee services are recorded at fair value on the date of grant and, for cash-
settled awards, re-measured quarterly over the life of the award. The awards are expensed in the Consolidated Statements of
Operations over the requisite employee service period. Our plan prior to April 30, 2014 authorized two types of incentive
awards for our key employees, both of which were based upon the value of our then outstanding Class A Common Stock: stock
appreciation rights (“SARs”) and phantom shares. Both types of awards are settled in cash. In the first quarter of 2014, our
Board of Directors adopted the 2014 Omnibus Incentive Plan, which was approved by our shareholders at our 2014 Annual
Meeting of Shareholders. Under this plan, we may award share-based compensation that does not have to be settled in cash to
certain key employees, directors and third-party service providers. During 2014, we have awarded non-qualified stock options
as well as restricted stock units ("RSUs"). The stock options will be settled in our Common Shares, while the RSU's will be
partially settled in our Common Shares and partially settled in cash.
Stock-based compensation expense is generally recognized over the vesting period on a straight-line basis. We determine the
fair value of the stock options and SARs using the Black-Scholes option pricing model. The Black-Scholes option pricing
model incorporates certain assumptions, such as risk-free interest rate, expected volatility, expected dividend yield and the
expected life, in order to arrive at a fair value estimate. Expected volatilities are based on the historical volatility of our
common shares. The risk-free interest rate is based upon quoted market yields for United States Treasury debt securities. The
expected dividend yield is based upon our history of not paying dividends since the second quarter of 2005 and management's
current plans regarding future dividends. We believe that the assumptions selected by management are reasonable; however,
significant changes could materially impact the results of the calculation of fair value.
The fair value of the phantom shares and the portion of the RSUs settled in cash is determined based on the closing stock price
on our Common Shares on the initial grant date and, for cash-settled phantom shares and RSUs, revalued based on the closing
price of our Common Shares as of the last business day of each quarterly period.
For the options and RSUs settled in our Common Shares, the fair value is based on the closing price of our Common Shares on
the grant date.
In addition to the awards to our employees and awards to our non-employee directors under the 2014 Omnibus Incentive Plan,
under our prior plan, we granted deferred stock units ("DSUs") to our non-employee directors under our Outside Directors'
Deferred Stock Unit Plan. These awards are fully vested when made. We measure the fair value of outstanding DSUs based
upon the closing stock price of our Common Shares on the last day of the reporting period. We will pay cash with respect to the
DSUs to a director after the earlier of a Company Change in Control, as defined in the plan, or the date when he or she ceases
to be a non-employee director for any reason. Since the DSUs are settled in cash rather than by issuing equity instruments, we
record an expense for DSUs, with a corresponding liability on our Consolidated Balance Sheets. See Note 10, “Share-based
Compensation Arrangements,” of the Notes to the Consolidated Financial Statements in Item 8 of this report for additional
information.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for
the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for
the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and
liabilities, and for operating loss and tax credit carry forwards. Management must make assumptions, judgments and estimates
to determine our current provision for income taxes, our deferred tax assets and liabilities and any valuation allowance to be
recorded against a deferred tax asset.
Our assumptions, judgments and estimates relative to the current provision for income taxes take into account current tax laws,
our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax
authorities. We establish reserves for income taxes to address potential exposures involving tax positions that could be
challenged by tax authorities. Although we believe our assumptions, judgments and estimates are reasonable, changes in tax
laws or our interpretation of tax laws or the resolution of current or any future tax audits could significantly impact the amounts
provided for income taxes in our consolidated financial statements.
Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the
amount and category of future taxable income, such as income from operations or capital gains income. Actual operating