Callaway 2009 Annual Report Download - page 44

of an asset or liability computed pursuant to ASC Topic 740 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. 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. While the
Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event the Company were to determine that it would be able
to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred
tax asset would increase income in the period such determination was made. Likewise, should the Company
determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to
the deferred tax asset would be a charge to income in the period such determination was made.
Pursuant to ASC Topic 740-25-6, the Company is required 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.
The Company is required to file federal and state income tax returns in the United States and various other
income tax returns in foreign jurisdictions. The preparation of these income tax returns requires the Company to
interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of
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 15 “Income Taxes” to the
Notes to Consolidated Financial Statements.
Share-based Compensation
The Company accounts for share-based compensation arrangements in accordance with ASC Topic 718,
which requires the measurement and recognition of compensation expense for all share-based payment awards to
employees and directors based on estimated fair values. ASC Topic 718 further requires a reduction in share-
based compensation expense by an estimated forfeiture rate. The forfeiture rate used by the Company is based on
historical forfeiture trends. 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.
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 risk-free rate, which is based on the U.S. Treasury yield curve in effect at the time of
grant for the estimated life of the option. The Company uses historical data to estimate the expected price
volatility, the expected dividend yield and the expected option life. 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. Compensation expense is
recognized on a straight-line basis over the vesting period, reduced by an estimated forfeiture rate.
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