AT&T Wireless 2006 Annual Report Download - page 67

2006 AT&T Annual Report : : 65
Foreign Currency Forward Contracts We enter into foreign
currency forward contracts to manage our exposure to
changes in currency exchange rates related to foreign-
currency-denominated transactions. At December 31, 2006
and 2005, our foreign exchange contracts consisted principally
of Euros, British pound sterling, Danish krone and Japanese
Yen. At December 31, 2006, the notional amounts under
contract were $440, of which $6 were designated as net
investment hedges. At December 31, 2005, the notional
amounts under contract were $623, of which $18 were
designated as net investment hedges. The remaining contracts
in both periods were not designated for accounting purposes.
There was no ineffectiveness recognized in earnings for these
contracts during 2006 and 2005. At December 31, 2006,
these foreign exchange contracts had a net carrying and fair
value asset of $1, comprised of an asset of $4 and a liability
of $3. At December 31, 2005, these foreign exchange con-
tracts had a net carrying and fair value liability of $8, com-
prised of an asset of $5 and a liability of $13. These contracts
were valued using current market quotes, which were
obtained from independent sources.
NOTE 9. INCOME TAXES
Significant components of our deferred tax liabilities (assets)
are as follows at December 31:
2006 2005
Depreciation and amortization $21,016 $13,921
Intangibles (nonamortizable) 2,271 1,874
Equity in foreign affiliates 515 727
Employee benefits (9,667) (4,897)
Currency translation adjustments (261) (272)
Allowance for uncollectibles (385) (351)
Unamortized investment tax credits (68) (79)
Net operating loss and other carryforwards (2,981) (838)
Investment in wireless partnership 12,580 2,597
Other – net 368 387
Subtotal 23,388 13,069
Deferred tax assets valuation allowance 984 627
Net deferred tax liabilities $24,372 $13,696
Net long-term deferred tax liabilities $27,406 $15,713
Less: Net current deferred tax assets (3,034) (2,011)
Less: Other assets — (6)
Net deferred tax liabilities $24,372 $13,696
At December 31, 2006 and 2005, net deferred tax liabilities
include a deferred tax asset of $456 and $542 relating to
compensation expense under Statement of Financial Account-
ing Standards No. 123(R) “Share-Based Payment” (FAS 123(R)).
Full realization of this deferred tax asset requires stock
options to be exercised at a price equaling or exceeding the
sum of the strike price plus the fair value of the option at the
grant date. The provisions of FAS 123(R), however, do not
allow a valuation allowance to be recorded unless the
company’s future taxable income is expected to be insufficient
to recover the asset. Accordingly, there can be no assurance
that the stock price of AT&T common shares will rise to levels
sufficient to realize the entire tax benefit currently reflected in
our balance sheet.
At December 31, 2006, we had net operating and capital
loss carryforwards (tax effected) for federal, state and foreign
income tax purposes of $1,507, $1,138 and $13 respectively
expiring through 2025. The federal net operating loss carry-
forward primarily relates to AT&T Mobility’s acquisition of
AWE in 2004. Additionally, we had federal and state credit
carryforwards of $71 and $252 respectively expiring primarily
through 2024.
The change in the valuation allowance for 2006 is primarily
the result of the acquisition of ATTC, BellSouth and AT&T
Mobility. Other changes are the result of an evaluation of the
uncertainty associated with the realization of certain deferred
tax assets unrelated to FAS 123(R). Future adjustments to the
valuation allowance attributable to the ATTC, BellSouth and
AT&T Mobility opening balance sheet items may be required to
be allocated to goodwill and other purchased intangibles.
In June 2006, the FASB issued FIN 48, which changes the
accounting for uncertainty in income taxes by prescribing a
recognition threshold for tax positions taken or expected to
be taken in a tax return. FIN 48 is effective for fiscal years
beginning after December 15, 2006. Our evaluation of the
impact FIN 48 will have on our financial position and results
of operations is ongoing.
The components of income tax expense are as follows:
2006 2005 2004
Federal:
Current $3,344 $1,385 $1,145
Deferred – net (139) (681) 843
Amortization of investment
tax credits (28) (21) (32)
3,177 683 1,956
State, local and foreign:
Current 295 226 427
Deferred – net 53 23 (197)
348 249 230
Total $3,525 $ 932 $2,186
A reconciliation of income tax expense and the amount
computed by applying the statutory federal income tax rate
(35%) to income before income taxes, income from discontin-
ued operations, extraordinary items and cumulative effect of
accounting changes is as follows:
2006 2005 2004
Taxes computed at federal
statutory rate $3,809 $2,001 $2,508
Increases (decreases) in
income taxes resulting from:
State and local income
taxes – net of federal
income tax benefit 234 176 213
Effects of international operations (200) (70) (222)
Medicare reimbursements (123) (95) (89)
Equity in net income of affiliates (218) (35) —
Tax settlements — (902) (65)
Other – net 23 (143) (159)
Total $3,525 $ 932 $2,186