Callaway 2014 Annual Report Download - page 42

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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, the valuation allowance could be reversed as appropriate,
decreasing income tax expense in the period that such conclusion is reached. The Company has 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.
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.
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 12 “Income Taxes” in the Notes to Consolidated Financial
Statements in this Form 10-K.
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 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 forfeitures are not consistent with the Company’s estimates, the Company may be required to increase or
decrease compensation expenses in future periods.
Performance share units are stock-based awards in which the number of shares ultimately received depends on the
Company's performance against specified metrics that are measured over a one-year performance period from the date of
grant. These performance metrics are established by the Company at the beginning of the performance period. At the end of
the performance period, the number of shares of stock that could be issued is fixed based upon the degree of achievement of
the performance goals. The number of shares that could be issued can range from 50% to 150% of the participant's target
award. Performance share units are initially valued at the Company's closing stock price on the date of grant. Compensation
expense for performance share units is recognized over the vesting period and is reduced by an estimate for forfeitures, and
will vary based on remeasurements during the performance period. If the performance metrics are not probable of achievement
during the performance period, compensation expense would be reversed. The awards are forfeited if the performance metrics
are not achieved as of the end of the performance period. The performance units vest in full at the end of a three year period.
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
term of an option or SAR and the risk-free interest rate, which is based on the U.S. Treasury yield curve in effect at the time
of grant. The Company uses historical data to estimate the expected price volatility and the expected term. The Company uses
forecasted dividends to estimate the expected dividend yield. 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