Pier 1 2009 Annual Report Download - page 43

with similar vesting periods. Expected volatility is based on the historical volatility of the common stock
of the Company for a period approximating the expected life. The risk free interest rate utilized is the
United States Treasury rate that most closely matches the weighted average expected life at the time of
the grant. The expected dividend yield is based on the annual dividend rate at the time of grant or
estimates of future anticipated dividend rates. If the Company had used different assumptions, the
value of stock options may have been different.
Income taxes—The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are determined based on differences between
financial reporting and income tax bases of assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax
assets and liabilities are recorded in the Company’s consolidated balance sheets and are classified as
current or noncurrent based on the classification of the related assets or liabilities for financial
reporting purposes. A valuation allowance is recorded to reduce the carrying amounts of deferred tax
assets unless it is more likely than not those assets will be realized. In assessing the need for a
valuation allowance, all available evidence is considered including past operating results, estimates of
future income, and tax planning strategies. The Company is subject to income tax in many jurisdictions,
including the United States, various states and localities, and foreign countries. At any point in time,
multiple tax years are subject to audit by various jurisdictions and the Company records reserves for
estimates of the tax exposure for foreign and domestic tax audits. The timing of these audits and
negotiations with taxing authorities may affect the ultimate settlement of these issues. If different
assumptions had been used, the Company’s tax expense or benefit, assets and liabilities could have
varied from recorded amounts. If actual results differ from estimated results or if the Company adjusts
these assumptions in the future, the Company may need to adjust its deferred tax assets or liabilities,
which could impact its effective tax rate.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation has not had a significant impact on the operations of the Company during the preceding
three years.
IMPACT OF NEW ACCOUNTING STANDARDS
In May 2008, the Financial Accounting Standards Board (‘‘FASB’’) issued FASB Staff Position
(‘‘FSP’’) APB 14-1, ‘‘Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)’’, which clarifies that convertible debt instruments that
may be settled in cash upon conversion (including partial cash settlement) are not addressed by
paragraph 12 of APB Opinion No. 14, ‘‘Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants.’’ Additionally, this FSP specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that will reflect the entity’s nonconvertible
debt borrowing rate when interest cost is recognized in subsequent periods. This FSP will be applied
retrospectively to all periods presented. FSP APB 14-1 is effective for the Company at the beginning of
fiscal year 2010. The Company is currently evaluating the impact of the adoption on its financial
statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Market risks relating to the Company’s operations result primarily from changes in foreign
exchange rates and interest rates. The Company has only limited involvement with derivative financial
instruments, does not use them for trading purposes and is not a party to any leveraged derivatives.
Collectively, the Company’s exposure to market risk factors is not significant and has not materially
changed from March 1, 2008.
36