Callaway 2011 Annual Report Download - page 86

calculation is more appropriate than using historical data since the amount of dividends paid have decreased
beginning in 2009. 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/SAR. 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
vesting period based on an estimated fair value, which is remeasured each reporting period. Once vested, the
SARs continue to be remeasured to fair value until they are exercised.
The Company records compensation expense for restricted stock awards and restricted stock units
(collectively “restricted stock”) 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 shares underlying the restricted stock awarded. Total compensation expense is recognized on a
straight-line basis over the vesting period.
Phantom stock units (“PSUs”) are a form of share-based awards that are indexed to the Company’s stock
and are settled in cash. As such, these awards are classified as liabilities. Because PSUs are settled in cash,
compensation expense recognized over the vesting period will vary based on changes in fair value. Fair value is
remeasured at the end of each interim reporting period through the award’s settlement date and is based on the
closing price of the Company’s stock.
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 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 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 $52,455,000 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.”
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. For further information, see Note 16
“Income Taxes.”
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