Callaway 2007 Annual Report Download - page 81

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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 subjective assumptions to calculate the value of stock
options. The Company uses historical data among other information to estimate the expected price volatility,
option life, dividend yield and 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. The total compensation is recognized on a straight-
line basis over the vesting period.
In accordance with SFAS 123R, the Company records compensation expense for Restricted Stock Awards
and Restricted Stock Units 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 on a straight-line
basis over the vesting period.
During 2006, the Company granted Performance Share Units to certain employees under the Company’s
2004 Equity Incentive Plan. Performance Share 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 from the date of grant. The estimated fair value of the Performance Share Units is determined
based on the closing price of the Company’s Common Stock on the award 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 Performance Share Units to be issued as well as approval from the Compensation and
Management Succession Committee. The Company’s performance against the specified performance targets is
reviewed quarterly.
Income Taxes
Current income tax expense or benefit is the amount of income taxes expected to be payable or receivable
for the current year. A deferred income tax asset or liability is established for the difference between the tax basis
of an asset or liability computed pursuant to FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”), and its reported amount in the financial statements that will result in taxable or deductible
amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively.
Deferred income tax expense or benefit is the net change during the year in the deferred income tax asset or
liability.
Effective January 1, 2007, the Company was required to adopt and implement the provisions of FIN 48,
which requires the Company to accrue for the estimated additional amount of taxes for uncertain tax positions if
it is more likely than not that the Company would be required to pay such additional taxes. An uncertain income
tax position will not be recognized if it has less than 50% likelihood of being sustained. As a result of the
adoption of FIN 48, the Company recognized an increase in the liability for its uncertain tax positions of
$437,000, of which the entire charge was accounted for as a decrease to the beginning balance of retained
earnings. The accrual for uncertain tax positions can result in a difference between the estimated benefit recorded
in the Company’s financial statements and the benefit taken or expected to be taken in the Company’s income tax
returns. This difference is generally referred to as an “unrecognized tax benefit.”
Deferred taxes have not been provided on the cumulative undistributed earnings of foreign subsidiaries
since such amounts are expected to be reinvested indefinitely. The Company provides a valuation allowance for
its deferred tax assets when, in the opinion of management, it is more likely than not that such assets will not be
realized (see Note 13).
F-11