Dollar General 2006 Annual Report Download - page 62

Company adopted SFAS 123(R) under the modified-prospective-transition method and,
therefore, results from prior periods have not been restated.
Prior to February 4, 2006, the Company accounted for share-based payments using the
intrinsic-value-based recognition method prescribed by Accounting Principles Board Opinion 25,
“Accounting for Stock Issued to Employees” (“APB 25”), and had provided pro forma
disclosures as permitted under SFAS 123. Because stock options were granted at an exercise
price equal to the market price of the underlying common stock on the date of grant,
compensation cost related to stock options was generally not required to be recorded as a
reduction to net income prior to adopting SFAS 123(R).
Under SFAS 123(R), forfeitures are estimated at the time of valuation and reduce
expense ratably over the vesting period. This estimate is adjusted periodically based on the
extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
The forfeiture rate is the estimated percentage of options granted that are expected to be forfeited
or canceled before becoming fully vested. The Company bases this estimate on historical
experience. An increase in the forfeiture rate will decrease compensation expense. Under SFAS
123, the Company elected to account for forfeitures when awards were actually forfeited.
SFAS 123(R) also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an operating cash flow
as required prior to the adoption of SFAS 123(R).
The fair value of each option grant is separately estimated. The fair value of each option
grant is amortized into compensation expense on a straight-line basis between the grant date for
the award and each vesting date. The Company has estimated the fair value of all stock option
awards as of the date of the grant by applying the Black-Scholes-Merton option pricing valuation
model. The application of this valuation model involves assumptions that are judgmental and
highly sensitive in the determination of compensation expense.
The Company also accounts for nonvested restricted stock and restricted stock unit
awards in accordance with the provisions of SFAS 123(R). The Company calculates
compensation expense as the difference between the market price of the underlying stock on the
date of grant and the purchase price, if any, and recognizes such amount on a straight-line basis
over the period in which the recipient earns the nonvested restricted stock and restricted stock
unit award. Under the provisions of SFAS 123(R), unearned compensation is not recorded within
shareholders’ equity.
The Company has elected to determine its excess tax benefit pool upon adoption of SFAS
123(R) in accordance with the provisions of FASB Staff Position (“FSP”) 123(R)-3, “Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” Under the
provisions of this FSP, the cumulative benefit of stock option exercises included in additional
paid-in capital for the periods after the effective date of SFAS 123 is reduced by the cumulative
income tax effect of the pro forma stock option expense previously disclosed in accordance with
the requirements of SFAS 123. (The provision of this FSP applied only to options that were fully
vested before the date of adoption of SFAS 123(R). The amount of any excess tax benefit for
options that are either granted after the adoption of SFAS 123(R) or are partially vested on the
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