Cracker Barrel 2009 Annual Report Download - page 50

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inventory shrinkage. Retail inventory is reviewed on a
quarterly basis for obsolescence and adjusted as
appropriate based on assumptions made by management
and judgment regarding inventory aging and future
promotional activities. Cost of goods sold includes an
estimate of shrinkage that is adjusted upon physical
inventory counts. Physical inventory counts are conducted
throughout the third and fourth quarters of the fiscal
year based upon a cyclical inventory schedule. An
estimate of shrinkage is recorded for the time period
between physical inventory counts by using a three-year
average of the physical inventories’ results on a store-
by-store basis. We have not made any material changes in
the methodology used to estimate retail inventory
obsolescence or shrinkage during 2009 and do not believe
there is a reasonable likelihood that there will be a
material change in the future estimates or assumptions
used to calculate obsolescence or shrinkage. However,
actual obsolescence or shrinkage recorded may produce
materially different amounts than we have estimated.
Tax Provision
We must make estimates of certain items that comprise
our income tax provision. These estimates include
effective state and local income tax rates, employer tax
credits for items such as FICA taxes paid on employee tip
income, Work Opportunity and Welfare to Work credits,
as well as estimates related to certain depreciation and
capitalization policies.
We recognize (or derecognize) a tax position taken
or expected to be taken in a tax return in the financial
statements when it is more likely than not (i.e., a
likelihood of more than fifty percent) that the position
would be sustained (or not sustained) upon examination
by tax authorities. A recognized tax position is then
measured at the largest amount of benefit that is
greater than fifty percent likely of being realized upon
ultimate settlement.
Our estimates are made based on current tax laws, the
best available information at the time of the provision
and historical experience. We file our income tax returns
many months after our year end. These returns are
subject to audit by various federal and state governments
years after the returns are filed and could be subject
to differing interpretations of the tax laws. We then must
assess the likelihood of successful legal proceedings
or reach a settlement with the relevant taxing authority.
Although we believe that the judgments and estimates
used in establishing our tax provision are reasonable, an
unsuccessful legal proceeding or a settlement could result
in material adjustments to our Consolidated Financial
Statements and our consolidated financial position.
Share-Based Compensation
Share-based compensation cost is measured at the grant
date based on the fair value of the award and is
recognized as expense over the requisite service period.
Our policy is to recognize compensation cost for
awards with only service conditions and a graded vesting
schedule on a straight-line basis over the requisite
service period for the entire award. Additionally, our
policy is to issue new shares of common stock to satisfy
exercises of share-based compensation awards.
The fair value of each option award granted was
estimated on the date of grant using a binomial lattice-
based option valuation model. This model incorporates
the following ranges of assumptions:
•
The expected volatility is a blend of implied volatility
based on market-traded options on our stock and
historical volatility of our stock over the contractual
life of the options.
•
We use historical data to estimate option exercise and
employee termination behavior within the valuation
model; separate groups of employees that have similar
historical exercise behavior are considered separately
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