Pier 1 2012 Annual Report Download - page 38

age or certain termination events, a participant will receive benefits based on highest compensation, years of
service and years of plan participation. These benefit costs are dependent upon numerous factors, assumptions
and estimates. Benefit costs may be significantly affected by changes in key actuarial assumptions such as the
discount rate, compensation rates, or retirement dates used to determine the projected benefit obligation.
Additionally, changes made to the provisions of the Plans may impact current and future benefit costs.
Stock-based compensation – For restricted stock awards, compensation expense is measured and
recorded using the closing price of the Company’s stock on the date of grant. If the date of grant occurs on a day
when the Company’s stock is not traded, then the closing price on the last trading day before the date of grant is
used. Restricted stock grants include time-based and performance-based shares. The time-based awards typically
vest ratably over a three-year period beginning on the first anniversary of the grant date provided that the
participant is employed on the vesting date. The total fair market value of the grant of the restricted stock shares
is expensed over the requisite service period. The performance-based shares vest upon the Company satisfying
certain performance targets. Performance based shares are considered granted for accounting purposes on the
date the performance targets are set, and the fair market value at that date is expensed over the requisite service
period.
The fair value of stock options is amortized as compensation expense over the vesting periods of the
options. The fair values for options granted by the Company are estimated as of the date of grant using the Black-
Scholes option-pricing model. Option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility and the average life of options. The Company uses expected
volatilities and risk-free interest rates that correlate with the expected term of the option when estimating an
option’s fair value. To determine the expected term of the option, the Company bases its estimates on historical
exercise activity of grants 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 that such 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. However, the Company’s management cannot be certain of the effect inflation may have on the
Company’s operations in the future.
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