Graco 2007 Annual Report Download - page 51

Newell Rubbermaid Inc. 2007 Annual Report
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Income Taxes
In accordance with SFAS No. 109, “Accounting for Income Taxes”, the Company accounts for deferred income taxes using the asset and liability approach.
Under this approach, deferred income taxes are recognized based on the tax effects of temporary differences between the financial statement and tax
bases of assets and liabilities, as measured by current enacted tax rates. Valuation allowances are recorded to reduce the deferred tax assets to an amount
that will more likely than not be realized. No provision is made for the U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries that are
considered to be permanently invested.
The Company’s income tax provisions are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and
other tax authorities. Although the Company believes that the positions taken on previously filed tax returns are reasonable, it has established tax and
interest reserves in recognition that various taxing authorities may challenge the positions taken, which could result in additional liabilities for taxes and
interest. The Company regularly reviews its deferred tax assets for recoverability considering historical profitability, projected future taxable income, the
expected timing of the reversals of existing temporary differences and tax planning strategies.
The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), on January 1, 2007. FIN 48 requires application of a “more likely than not” threshold to the recognition and derecognition of tax positions.
The Company’s ongoing assessments of the more-likely-than-not outcomes of tax authority examinations and related tax positions require significant
judgment and can increase or decrease the Company’s effective tax rate, as well as impact operating results. The adoption of FIN 48 did not result in an
adjustment to beginning retained earnings; however, it did result in the reclassification of certain income tax assets and liabilities from current to long-term
in the Company’s Consolidated Balance Sheet. See Footnote 16 for additional information on income taxes.
Stock-Based Compensation
Prior to January 1, 2006, the Company recognized stock-based compensation expense by applying the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under APB 25, the Company generally recognized compensation
expense only for restricted stock grants. The Company recognized the compensation expense associated with the restricted stock ratably over the associated
service period.
Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), using the
modified prospective transition method, and therefore has not restated the results of prior periods. Under this transition method, stock-based compensation
expense for 2007 and 2006 includes (i) compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1,
2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,”
and (ii) compensation expense for all share-based payment awards granted after January 1, 2006 based on estimated grant-date fair values estimated in
accordance with the provisions of SFAS 123(R). Compensation expense is adjusted for estimated forfeitures and is recognized on a straight-line basis
over the requisite service period of the award, which is generally five years for stock options and three years for restricted stock. The Company estimates
future forfeiture rates based on its historical experience. See Footnote 15 for additional information.
The following table is a reconciliation of the Company’s net income and earnings per share to pro forma net income and pro forma earnings per share
as if the Company had adopted the provisions of SFAS No. 123 with respect to options granted under the Company’s stock option plans in 2005 (in millions,
except per share data):
Net income:
As reported $251.3
Fair value option expense, net of income taxes of $6.7 million (11.0)
Pro forma $240.3
Basic earnings per share:
As reported $ 0.92
Pro forma $ 0.88
Diluted earnings per share:
As reported $ 0.91
Pro forma $ 0.87