Comfort Inn 2007 Annual Report Download - page 60

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
The following table illustrates the effect on net income and earnings per share as if the fair value based method had
been applied to all outstanding and unvested awards during the year ended December 31, 2005.
December 31, 2005
(In millions, except per
share amounts)
Net income, as reported.................................................................................................................... $ 87.6
Stock-
b
ased employee compensation expense included in reported net income, net of related tax
effects .......................................................................................................................................... 2.9
Total stock-based employee compensation expense determined under fair value method for all
awards, net of related tax effects ................................................................................................. (4.7)
Pro forma, net income ...................................................................................................................... $ 85.8
Earnings per share:
Basic, as reported ............................................................................................................................. $ 1.36
Basic, pro forma............................................................................................................................... $ 1.33
Diluted, as reported .......................................................................................................................... $ 1.32
Diluted, pro forma............................................................................................................................ $ 1.29
The Company’ s stock-based compensation plans and related accounting policies are described more fully in Note
18.
Sales Taxes
The Company presents taxes collected from customers and remitted to governmental authorities on a net basis and
therefore are excluded from our revenues in our consolidated financial statements.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”.
Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been
included in the financial statements or income tax returns. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and liabilities using enacted rates expected to apply to
taxable income in the years in which those differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company does not provide additional United States income taxes on undistributed earnings of consolidated
foreign subsidiaries included in retained earnings. Such earnings could become taxable upon the sale or liquidation of
these foreign subsidiaries or upon dividend repatriation. The Company’ s intent is for such earnings to be reinvested by the
subsidiaries. On October 22, 2004, the American Jobs Creation Act of 2004 (“AJCA”) was signed into law. The AJCA
included a temporary one time incentive for United States multinational corporations to repatriate accumulated income of
foreign subsidiaries by providing an 85 percent dividends received deduction for qualifying dividends from controlled
foreign corporations. The Company repatriated earnings pursuant to AJCA totaling $23.5 million in the fourth quarter of
2005 resulting in an income tax provision of $1.2 million.
The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the
application of complex tax laws. Judgment is required in determining our worldwide income tax provision. In the ordinary
course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some
of these uncertainties arise as a consequence of cost reimbursement arrangements among related entities. Although we
believe our estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be
different than that which is reflected in our historical income tax provisions and accruals. Tax assessments and resolution
of tax contingencies may arise several years after tax returns have been filed. Predicting the outcome of such tax
assessments involves uncertainty; however, we believe that recorded tax liabilities adequately account for our analysis of
probable outcomes. Resolution of these uncertainties in a manner inconsistent with the Company’ s expectations could
have a material impact on the Company’ s results of operations.
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