Callaway 2011 Annual Report Download - page 43

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. In accordance with the applicable accounting rules, the
Company maintains a valuation allowance for a deferred tax asset when it is deemed it to be more likely than not
that some or all of the deferred tax asset will not be realized. In evaluating whether a valuation allowance is
required under such rules, the Company considers all available positive and negative evidence, including prior
operating results, the nature and reason for any losses, its forecast of future taxable income, and the dates on
which any deferred tax assets are expected to expire. These assumptions require a significant amount of
judgment, including estimates of future taxable income. These estimates are based on the Company’s best
judgment at the time made based on current and projected circumstances and conditions. As a result of the
Company’s evaluation during 2011, the Company recorded a $52.5 million increase to income tax expense in
order to establish a valuation allowance against its U.S. deferred tax assets. In addition, the Company has
discontinued recognizing income tax benefits related to its U.S. net operating losses until it is determined that it
is more likely than not that the Company will generate sufficient taxable income to realize the benefits from its
U.S. deferred tax assets. For further information, see Note 16 “Income Taxes” to the Notes to Consolidated
Financial Statements in this Form 10-K.
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 deemed to be more likely than not that the Company would be required to
pay such additional taxes.
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 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
and stock appreciation rights (“SARs”) 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 or SAR 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 or SAR. The Company uses historical
data to estimate the expected price volatility and the expected option or SAR 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 or SAR.
Furthermore, the estimated fair value of an option or SAR 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 for stock options. Compensation expense for SARs is recognized on a straight-line basis over the
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