ADT 2005 Annual Report Download - page 181

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income Taxes (Continued)
Deferred income taxes result from temporary differences between the amount of assets and
liabilities recognized for financial reporting and tax purposes. The components of the net deferred
income tax asset at September 30, 2005 and 2004 are as follows ($ in millions):
2005 2004
Deferred tax assets:
Accrued liabilities and reserves ......................... $1,424 $1,565
Tax loss and credit carryforwards ........................ 3,165 2,846
Inventories ........................................ 149 201
Postretirement benefits ............................... 582 496
Deferred revenue ................................... 225 254
Other ........................................... 500 329
6,045 5,691
Deferred tax liabilities:
Property, plant and equipment ......................... (516) (569)
Intangibles assets ................................... (755) (383)
Other ........................................... (231) (262)
(1,502) (1,214)
Net deferred tax asset before valuation allowance ............. 4,543 4,477
Valuation allowance ................................... (1,867) (1,967)
Net deferred tax asset ................................ $2,676 $2,510
At September 30, 2005, the Company had $3,967 million of net operating loss carryforwards in
certain non-U.S. jurisdictions. Of these, $2,890 million have no expiration, and the remaining
$1,077 million will expire in future years through 2015. In the U.S., there were approximately
$4,162 million of federal and $5,128 million of state net operating loss carryforwards at September 30,
2005, which will expire in future years through 2025.
The valuation allowance for deferred tax assets of $1,867 million and $1,967 million at
September 30, 2005 and 2004, respectively, relates principally to the uncertainty of the utilization of
certain deferred tax assets, primarily tax loss and credit carryforwards in various jurisdictions. The
Company believes that it will generate sufficient future taxable income to realize the tax benefits
related to the remaining net deferred tax assets. The valuation allowance was calculated in accordance
with the provisions of SFAS No. 109, ‘‘Accounting for Income Taxes,’’ which requires that a valuation
allowance be established or maintained when it is ‘‘more likely than not’’ that all or a portion of
deferred tax assets will not be realized. At September 30, 2005, approximately $162 million of the
valuation allowance will ultimately reduce goodwill if the net operating losses are utilized.
The Company and its subsidiaries’ income tax returns are periodically examined by various tax
authorities. In connection with such examinations, certain tax authorities, including the U.S. Internal
Revenue Service (‘‘IRS’’), have raised issues and proposed tax deficiencies. The Company is reviewing
the issues raised by the tax authorities and is contesting certain proposed tax deficiencies. Amounts
related to these tax deficiencies and other tax contingencies that management has assessed as probable
and estimable have been recorded through the income tax provision.
The calculation of our tax liabilities involves dealing with uncertainties in the application of
complex tax regulations in a multitude of jurisdictions across our global operations. We recognize
2005 Financials 105