Cracker Barrel 2010 Annual Report Download - page 35

judgments and estimates used in establishing our tax
provision are reasonable, an unsuccessful legal proceeding or
a selement could result in material adjustments to our
Consolidated Financial Statements and our consolidated
nancial 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.
e fair value of each option award granted was estimated
on the date of grant using a binomial laice-based option
valuation model. is model incorporates the following
ranges of assumptions:
• e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
for valuation purposes. e expected life of options granted
is derived from the output of the option valuation model
and represents the period of time the options are expected
to be outstanding.
• erisk-freeinterestrateisbasedontheU.S.Treasuryyield
curve in eect at the time of grant for periods within the
contractual life of the option.
• eexpecteddividendyieldisbasedonourcurrent
dividend yield as the best estimate of projected dividend
yield for periods within the contractual life of the option.
e expected volatility, option exercise and termination
assumptions involve management’s best estimates at that
time, all of which aect the fair value of the option calculated
by the binomial laice-based option valuation model and,
ultimately, the expense that will be recognized over the life of
the option. We update the historical and implied components
of the expected volatility assumption when new grants are
made. We update option exercise and termination assump-
tions annually. e expected life is a by-product of the laice
model and is updated when new grants are made.
Compensation expense is recognized for only the portion
of options that are expected to vest. erefore, an estimated
forfeiture rate derived from historical employee termination
behavior, grouped by job classication, is applied against
share-based compensation expense. e forfeiture rate is
applied on a straight-line basis over the service (vesting)
period for each separately vesting portion of the award as if
the award were, in-substance, multiple awards. We update the
estimated forfeiture rate to actual on each of the vesting dates
and adjust compensation expense accordingly so that the
amount of compensation cost recognized at any date is at least
equal to the portion of the grant-date value of the award that
is vested at that date.
Generally, the fair value of each nonvested stock grant is
equal to the market price of our stock at the date of grant
reduced by the present value of expected dividends to be paid
prior to the vesting period, discounted using an appropriate
risk-free interest rate.
All of our nonvested stock grants are time vested except the
nonvested stock grants of one executive that are based upon
the achievement of strategic goals. Compensation cost for
performance-based awards is recognized when it is probable
that the performance criteria will be met. At each reporting
period, we reassess the probability of achieving the perfor-
mance targets and the performance period required to meet
those targets. Determining whether the performance targets
will be achieved involves judgment and the estimate of
expense may be revised periodically based on the probability
of achieving the performance targets. Revisions are reected
in the period in which the estimate is changed. If any
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