Nike 2009 Annual Report Download - page 49

occur. Once an anticipated transaction estimate or actual transaction amount decreases below hedged levels, we
make adjustments to the related hedge contract in order to reduce the amount of the hedge contract to that of the
revised anticipated transaction.
We use forward contracts to hedge our investment in the net assets of certain international subsidiaries to
offset foreign currency translation and economic exposures related to our net investment in those subsidiaries.
When appropriately designated as a hedge in accordance with FAS 133, the change in fair value of the forward
contracts hedging our net investments is reported in the cumulative translation adjustment component of
accumulated other comprehensive income within stockholders’ equity to offset the foreign currency translation
adjustments on those investments.
As the value of our underlying net investments in wholly-owned international subsidiaries is known at the
time a hedge is placed, the designated hedge is matched to the portion of our net investment at risk. Accordingly,
the variability involved in net investment hedges is substantially less than that of other types of hedge
transactions and we do not expect any material ineffectiveness. In accordance with FAS 133, we consider, on a
quarterly basis, the need to redesignate existing hedge relationships based on changes in the underlying net
investment. Should the level of our net investment decrease below hedged levels, any resulting ineffectiveness
would be reported directly to earnings in the period incurred.
Stock-based Compensation
As of the first quarter of fiscal 2007, we account for stock-based compensation in accordance with SFAS
No. 123R “Share-Based Payment” (“FAS 123R”). Under the provisions of FAS 123R, the fair value of stock-
based compensation is estimated on the date of grant using the Black-Scholes option pricing model. The Black-
Scholes option pricing model requires the input of highly subjective assumptions including volatility. Expected
volatility is estimated based on implied volatility in market traded options on our common stock with a term
greater than one year, along with other factors. Our decision to use implied volatility was based on the
availability of actively traded options on our common stock and our assessment that implied volatility is more
representative of future stock price trends than historical volatility. If factors change and we use different
assumptions for estimating stock-based compensation expense in future periods, stock-based compensation
expense may differ materially in the future from that recorded in the current period.
Taxes
We record valuation allowances against our deferred tax assets, when necessary, in accordance with
SFAS No. 109, “Accounting for Income Taxes” (“FAS 109”). Realization of deferred tax assets (such as net
operating loss carry-forwards) is dependent on future taxable earnings and is therefore uncertain. At least
quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable
income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our
deferred tax asset, which increases our income tax expense in the period when such determination is made.
In addition, we have not recorded U.S. income tax expense for foreign earnings that we have determined to
be indefinitely reinvested offshore, thus reducing our overall income tax expense. The amount of earnings
designated as indefinitely reinvested offshore is based upon the actual deployment of such earnings in our
offshore assets and our expectations of the future cash needs of our U.S. and foreign entities. Income tax
considerations are also a factor in determining the amount of foreign earnings to be indefinitely reinvested
offshore.
We carefully review all factors that drive the ultimate disposition of foreign earnings determined to be
reinvested offshore, and apply stringent standards to overcoming the presumption of repatriation. Despite this
approach, because the determination involves our future plans and expectations of future events, the possibility
exists that amounts declared as indefinitely reinvested offshore may ultimately be repatriated. For instance, the
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