Callaway 2010 Annual Report Download - page 44

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 ASC Topic 740, “Income Taxes,” 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. As required under applicable accounting rules, the Company 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. 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 16 “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,
“Stock Compensation,” 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 forfeitures 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 and the expected option life. The Company uses forecasted dividends to estimate the expected dividend
yield. The Company believes a forecasted calculation is more appropriate than using historical data since the
amount of dividends paid have decreased beginning in 2009. 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.
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