Callaway 2007 Annual Report Download - page 42

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tax paid by the Company. The Company, in consultation with its tax advisors, bases its income tax returns on
interpretations that are believed to be reasonable under the circumstances. The income tax returns, however, are
subject to routine audits by the various federal, state and international taxing authorities in the jurisdictions in
which the Company files its income tax returns. As part of these reviews, a taxing authority may disagree with
respect to the tax positions taken by the Company. The resolution of any disagreements over the Company’s tax
positions often involves complex issues and may span multiple years, particularly if litigation is involved. The
ultimate resolution of these tax positions is often uncertain until the audit is complete and any disagreements are
resolved. As required under applicable accounting rules, the Company therefore accrues an amount for its
estimate of additional tax liability, including interest and penalties, for any uncertain tax positions taken or
expected to be taken in an income tax return. The Company reviews and updates the accrual for uncertain tax
positions as more definitive information becomes available from taxing authorities, completion of tax audits,
expiration of statute of limitations, or upon occurrence of other events. Historically, additional taxes paid as a
result of the resolution of the Company’s uncertain tax positions have not been materially different from the
Company’s expectations. Information regarding income taxes is contained in Note 13 to the Consolidated
Financial Statements.
Share-based Employee Compensation
Beginning in fiscal year 2006, the Company accounts for share-based compensation arrangements in
accordance with the provisions of Statement of Financial Accounting Standards No. 123R (“SFAS 123R”)
“Share-Based Payments,” which requires the measurement and recognition of compensation expense for all
share-based payment awards to employees and directors based on estimated fair values. The Company uses the
Black-Scholes option valuation model to estimate the fair value of its stock options at the date of grant. The
Black-Scholes option valuation model requires the input of highly subjective assumptions including the
Company’s expected stock price volatility, the expected dividend yield, the expected life of an option and the
number of awards ultimately expected to vest. Changes in subjective input assumptions can materially affect the
fair value estimates of an option. Furthermore, the estimated fair value of an option does not necessarily
represent the value that will ultimately be realized by an employee. The Company uses historical data to estimate
the expected price volatility, the expected dividend yield, the expected option life and the expected forfeiture
rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated
life of the option. If actual results are not consistent with the Company’s assumptions and judgments used in
estimating the key assumptions, the Company may be required to increase or decrease compensation expense,
which could be material to its results of operations.
In accordance with SFAS 123R, the Company records compensation expense for Restricted Stock Awards
based on the estimated fair value of the award on the date of grant. The estimated fair value is determined based
on the closing price of the Company’s Common Stock on the award date multiplied by the number of awards
expected to vest. The number of awards expected to vest is based on the number of awards granted adjusted by
estimated forfeiture rates. The total compensation cost is then recognized ratably over the vesting period. If
actual forfeiture rates are not consistent with the Company’s estimates, the Company may be required to increase
or decrease compensation expenses in future periods.
During 2006 the Company granted Performance Units to certain employees under the Company’s 2004
Equity Incentive Plan. Performance Units are a form of share-based award in which the number of shares
ultimately received depends on the Company’s performance against specified performance targets over a three
year period. The estimated fair value of the Performance Units is determined based on the closing price of the
Company’s Common Stock on the grant date multiplied by the expected number of shares to be issued at the end
of the performance period. The compensation cost is then amortized on a straight-line basis over the performance
period. The Company uses forecasted performance metrics to estimate the number of shares that will ultimately
be issued. If actual results are not consistent with the Company’s assumptions and judgments used in estimating
the forecasted metrics, the Company may be required to increase or decrease compensation expense, which could
be material to its results of operations.
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