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Liability for Sabbatical Leave.  In certain of our operations, we offer employees a sabbatical leave. Although the sabbatical policy varies by region, in general, Morningstar’s full-time employees are eligible for six weeks of paid time off after four years of continuous service. We account for our sabbatical liability in accordance with FASB ASC 710-10-25, Compensated Absences . We record a liability for employees’ sabbatical benefits over the period employees earn the right for sabbatical leave. 

Income Taxes.  We record deferred income taxes for the temporary differences between the carrying amount of assets and liabilities for financial statement purposes and the amounts used for income tax purposes in accordance with FASB ASC 740, Income Taxes . FASB ASC 740 prescribes the minimum recognition threshold a tax posi- tion is required to meet before being recognized in the financial statements, and also provides guidance on derecognition, measure- ment, classification, interest and penalties, accounting in interim periods, and disclosure for uncertain tax positions. 

We recognize interest and penalties related to unrecognized tax benefits as part of income tax expense in our Consolidated Statements of Income. We classify liabilities related to unrecognized tax benefits as either current liabilities or “Other long-term liabilities” in our Consolidated Balance Sheet, depending on when we expect to make payment. 

Income per Share.  We compute and present income per share in accordance with FASB ASC 260, Earnings Per Share . The difference between weighted average shares outstanding and diluted shares outstanding primarily reflects the dilutive effect associated with our stock-based compensation plans. 

Beginning in 2010, we compute income per share in accordance with FASB ASC 260-10-45-59A, Participating Securities and the Two Class Method . In May 2010, we issued restricted stock in con- junction with the acquisition of Realpoint, LLC. 

Because the restricted stock contains nonforfeitable rights to divi- dends, it meets the criteria of a participating security. Under the two-class method, we allocate earnings between common stock and participating securities. The two-class method includes an earn- ings allocation formula that determines earnings per share for each class of common stock according to dividends declared and undis- tributed earnings for the period. For purposes of calculating earnings per share, we reduce our reported net earnings by the amount allo- cated to participating securities to arrive at the earnings allocated to common stock shareholders. 

ASC 260-10-45-59A requires the dilutive effect of participating securities to be calculated using the more dilutive of the treasury stock or the two-class method. We have determined the two-class method to be the more dilutive. As such, we adjusted the earnings allocated to common stock shareholders in the basic earnings per share calculation for the reallocation of undistributed earnings to participating securities to calculate diluted earnings per share. 

Foreign Currency.  We translate the financial statements of non-U.S. subsidiaries to U.S. dollars using the period-end exchange rate for assets and liabilities and an average exchange rate for revenue and expense. We use the local currency as the functional currency for all of our non-U.S. subsidiaries. We record translation adjustments for non-U.S. subsidiaries as a component of “Accumulated other comprehensive income (loss)” in our Consolidated Statements of Equity and Comprehensive Income (Loss). We include exchange gains and losses arising from transactions denominated in curren- cies other than the functional currency in “Other income (expense), net” in our Consolidated Statements of Income. 

## 4. Income Per Share 

The following table shows how we reconcile our net income and the number of shares used in computing basic and diluted income per share: 

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