Under Armour 2011 Annual Report Download - page 65

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Earnings per Share
Basic earnings per common share is computed by dividing net income available to common stockholders for
the period by the weighted average number of common shares outstanding during the period. Any stock-based
compensation awards that are determined to be participating securities, which are stock-based compensation
awards that entitle the holders to receive dividends prior to vesting, are included in the calculation of basic
earnings per share using the two class method. Diluted earnings per common share is computed by dividing net
income available to common stockholders for the period by the diluted weighted average common shares
outstanding during the period. Diluted earnings per share reflects the potential dilution from common shares
issuable through stock options, warrants, restricted stock units and other equity awards. Refer to Note 12 for
further discussion of earnings per share.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with accounting guidance that requires
all stock-based compensation awards granted to employees and directors to be measured at fair value and
recognized as an expense in the financial statements. In addition, this guidance requires that excess tax benefits
related to stock-based compensation awards be reflected as financing cash flows.
The Company uses the Black-Scholes option-pricing model to estimate the fair market value of stock-based
compensation awards. As the Company does not have sufficient historical exercise data to provide a reasonable
basis upon which to estimate the expected life due to the limited period of time its shares of Class A Common
Stock have been publicly traded, it uses the “simplified method” as permitted by accounting guidance. The
“simplified method” calculates the expected life of a stock option equal to the time from grant to the midpoint
between the vesting date and contractual term, taking into account all vesting tranches. The risk free interest rate
is based on the yield for the U.S. Treasury bill with a maturity equal to the expected life of the stock option.
Expected volatility is based on an average for a peer group of companies similar in terms of type of business,
industry, stage of life cycle and size. Compensation expense is recognized net of forfeitures on a straight-line
basis over the total vesting period, which is the implied requisite service period. Compensation expense for
performance-based awards is recorded over the implied requisite service period when achievement of the
performance target is deemed probable. The forfeiture rate is estimated at the date of grant based on historical
rates.
In addition, the Company recognized expense for stock-based compensation awards granted prior to the
Company’s initial filing of its S-1 Registration Statement in accordance with accounting guidance that allows the
intrinsic value method. Under the intrinsic value method, stock-based compensation expense of fixed stock
options is based on the difference, if any, between the fair value of the company’s stock on the grant date and the
exercise price of the option. The stock-based compensation expense for these awards was fully amortized in
2010. Had the Company elected to account for all stock-based compensation awards at fair value, the impact to
net income and earnings per share for the years ended December 31, 2010 and 2009 would not have been
material to its consolidated financial position or results of operations.
The Company issues new shares of Class A Common Stock upon exercise of stock options, grant of
restricted stock or share unit conversion. Refer to Note 13 for further details on stock-based compensation.
Management Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
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