Callaway 2013 Annual Report Download - page 83

F-13
Share-Based Compensation
The Company accounts for its share-based compensation arrangements in accordance with ASC Topic 718,
“Compensation—Stock Compensation” (“ASC Topic 718”), which requires the measurement and recognition of
compensation expense for all share-based payment awards to employees and non-employees 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 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 historical
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.
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