Sally Beauty Supply 2006 Annual Report Download - page 57

Table of Contents
appropriate classification of amounts received in the statements of earnings. We record cash consideration expected to be received
from vendors in other receivables. These receivables are recorded at the amount we believe will be collected based on the provisions
of the programs in place and are computed by estimating the point in time that we have completed our performance under the
agreements and the amounts earned. These receivables could be significantly affected if actual results differ from management’ s
expectations.
Income Taxes
We record tax provisions in our consolidated financial statements based on an estimation of current income tax liabilities. The
development of these provisions requires judgments about tax issues, potential outcomes and timing. If we prevail in tax matters for
which provisions have been established or is required to settle matters in excess of established provisions, our effective tax rate for a
particular period could be significantly affected.
Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which temporary differences are estimated to be recovered or settled. We
believe that it is more likely than not that results of future operations will generate sufficient taxable income to realize our deferred tax
assets, net of the valuation allowance currently recorded. In the future, if we determine that certain deferred tax assets will not be
realizable, the related adjustments could significantly affect our effective tax rate at that time.
Stock-Based Compensation
Effective October 1, 2005, we adopted SFAS No. 123 (R) using the modified prospective method. Under this method, compensation
expense is recognized for new stock option grants beginning in fiscal year 2006 and for the unvested portion of outstanding stock
options that were granted prior to the adoption of SFAS No. 123 (R). We recognize compensation expense on a straight-line basis over
the vesting period or to the date a participant becomes eligible for retirement, if earlier.
The amount of stock option expense is determined based on the fair value of each stock option grant, which is estimated on the date
of grant using the Black-Scholes option pricing model with the following assumptions: expected life, volatility, risk-free interest rate
and dividend yield. The expected life of stock options represents the period of time that the stock options granted are expected to be
outstanding. We estimate the expected life based on historical exercise trends. We estimate expected volatility based on the historical
volatility of Alberto-Culver’ s common stock. The estimate of the risk-free interest rate is based on the U.S. Treasury bill rate for the
expected life of the stock options. The dividend yield represents Alberto-Culver’ s anticipated cash dividend over the expected life of
the stock options. The amount of stock option expense recorded is significantly affected by these estimates. In addition, we record
stock option expense based on an estimate of the total number of stock options expected to vest, which requires us to estimate future
forfeitures. We use historical forfeiture experience as a basis for this estimate. Actual forfeitures differing from these estimates could
significantly affect the timing of the recognition of stock option expense. We have based all these estimates on Alberto-Culver’ s
assumptions as of September 30, 2006. Our estimates for future periods will be based on different assumptions and accordingly may
differ. Among other things, historical volatility data does not exist for our common stock, and under our current dividend policy, we
do not plan to pay dividends in the foreseeable future. Our assumptions in these and other respects for future periods have not yet been
determined.
Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for the uncertainty in income taxes recognized by prescribing a
recognition threshold that a tax position is required to meet before being recognized in the financial statements. It also provides
guidance on derecognition, classification, interest and penalties, interim period accounting and disclosure. FIN 48 is effective for
fiscal years beginning after December 15, 2006. We are currently assessing the effect of this pronouncement on our consolidated
financial statements.
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