Thrifty Car Rental 2010 Annual Report Download - page 52

retained for the supplemental liability insurance program. The obligation for Vehicle
Insurance Reserves represents an estimate of both reported accident claims not yet paid
and claims incurred but not yet reported, up to the Company’s risk retention level. The
Company records expense related to Vehicle Insurance Reserves on a monthly basis based
on rental volume and projections of ultimate losses, expenses, premiums and administrative
costs that are derived from historical accident claim experience and trends. Management
monitors the adequacy of the liability and monthly accrual rates based on actuarial analysis
of the development of the claim reserves, the accident claim history and rental volume.
Since the ultimate disposition of the claims is uncertain, the likelihood of materially different
results is possible. However, the potential volatility of these estimates is reduced due to the
frequency of actuarial reviews and significant historical data available for similar claims.
Income taxes – The Company estimates its consolidated effective state income tax rate
using a process that estimates state income taxes by entity and by tax jurisdiction. Changes
in the Company’s operations in these tax jurisdictions may have a material impact on the
Company’s effective state income tax rate and deferred state income tax assets and
liabilities. Additionally, the Company records deferred income tax assets and liabilities
based on the temporary differences between the financial reporting basis and the tax basis
of the Company’s assets and liabilities by applying enacted statutory tax rates that
management believes will be applicable to future years for these differences. Changes in
tax laws and rates in future periods may materially affect the amount of recorded deferred
tax assets and liabilities. The Company also utilizes the Like-Kind Exchange Program to
defer tax basis gains on disposal of eligible revenue-earning vehicles. This Program
requires the Company to make material estimates related to future fleet activity. The
Company’s income tax returns are periodically examined by various tax authorities who may
challenge the Company’s tax positions. While the Company believes its tax positions are
more likely than not supportable by tax rulings, interpretations, precedents or administrative
practices, there may be instances in which the Company may not succeed in defending a
position being examined. Resulting adjustments could have a material impact on the
Company’s financial position or results of operations.
Share-based payment plans – The Company has share-based compensation plans under
which the Company grants performance shares, non-qualified option rights and restricted
stock to key employees and non-employee directors. The Company uses the closing market
price of DTG’s common stock on the date of grant to estimate the fair value of the nonvested
stock awards and performance based performance shares, and uses a lattice-based option
valuation model to estimate the fair value of market based performance shares. The lattice-
based option valuation model requires the input of somewhat subjective assumptions,
including expected stock price volatility, term, risk-free interest rate and dividend yield. The
Company relies on observations of historical volatility trends of the Company and its peers
(defined as the Russell 2000 Index), as determined by an independent third party, to
determine expected volatility. In determining the expected term, the Company observes the
actual terms of prior grants and the actual vesting schedule of the grant. The risk-free
interest rate is the actual U.S. Treasury zero-coupon rate for bonds matching the expected
term of the award on the date of grant. The expected dividend yield was estimated based on
the Company’s current dividend yield, and adjusted for anticipated future changes. The
number of performance shares ultimately earned will range from zero to 200% of the target
award, depending on the Company’s achievement of the performance and market
conditions. Estimates of achievement of market conditions are incorporated into the
determination of the performance shares’ fair value at the beginning of the performance
period. At the end of each reporting period, the Company must estimate whether the
performance conditions will be achieved in order to determine the value of the performance
shares awarded. In making this determination, the Company has observed actual past
performance of the Company.
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