Callaway 2012 Annual Report Download - page 89

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
and stock appreciation rights (“SARs”) at the date of grant. The Black-Scholes option valuation model requires
the input of subjective assumptions to calculate the value of stock options/SARs. The Company uses historical
data among other information to estimate the expected price volatility, expected term, and forfeiture rate. The
Company uses forecasted dividends to estimate the expected dividend yield. The risk-free interest rate is based
on the U.S. Treasury yield curve in effect at the time of grant. 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 at the end of 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. Compensation expense is recognized on a straight-line basis over the vesting period based
on the award’s estimated 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. The Company maintains a valuation allowance for a deferred tax asset when
it is deemed 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. In
2011, as a result of this evaluation, the Company recorded a valuation allowance against its U.S. deferred tax
assets. At the end of each interim and annual reporting period, as the U.S. deferred tax assets are adjusted
upwards or downwards, the associated valuation allowance and income tax expense are also adjusted. If
sufficient positive evidence arises in the future, such as a sustained return to profitability in the U.S. business,
any existing valuation allowance could be reversed as appropriate, decreasing income tax expense in the period
that such conclusion is reached. The Company concluded that with respect to non-U.S. entities, there is sufficient
positive evidence to conclude that the realization of its deferred tax assets is deemed to be likely, and no
allowances have been established. For further information, see Note 12 “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.
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