Cisco 2006 Annual Report Download - page 72

2006 Annual Report 75
The components of the deferred tax assets and liabilities are as follows (in millions):
July 29, 2006 July 30, 2005
ASSETS
Allowance for doubtful accounts and returns $ 290 $ 264
Sales-type and direct-financing leases 104 104
Inventory allowances and capitalization 224 239
Investment provisions 273 313
In-process R&D, goodwill, and purchased intangible assets 473 501
Deferred revenue 825 770
Credits and net operating loss carryforwards 526 571
SFAS 123(R) stock-based compensation expense 326 —
Other 652 620
Gross deferred tax assets 3,693 3,382
Valuation allowance (45) (85)
Total deferred tax assets 3,648 3,297
LIABILITIES
Purchased intangible assets (695) (189)
Unremitted earnings of foreign subsidiaries (100) —
Unrealized gains on investments (104) (161)
Depreciation (185) (153)
Other (45) (11)
Total deferred tax liabilities (1,129) (514)
Total net deferred tax assets $ 2,519 $ 2,783
Certain reclassications have been made to the scal 2005 balances for certain components of deferred tax assets and liabilities in order
to conform to the current year’s presentation.
The valuation allowance decreased from $85 million at July 30, 2005 to $45 million at July 29, 2006. Of the $45 million valuation allowance,
$6 million is attributable to acquired deferred tax assets of acquisitions for which any subsequent reduction of this valuation allowance would
be applied rst to reduce goodwill and then intangible assets of the acquired entity.
As of July 29, 2006, the Company’s federal and state net operating loss carryforwards for income tax purposes were $190 million and
$2.0 billion, respectively. If not utilized, the federal net operating loss carryforwards will begin to expire in scal 2019, and the state net operating
loss carryforwards will begin to expire in scal 2007. As of July 29, 2006, the Company’s federal and state tax credit carryforwards for income
tax purposes were approximately $9 million and $543 million, respectively. If not utilized, the federal and state tax credit carryforwards will
begin to expire in scal 2009.
The Company’s income taxes payable for federal, state, and foreign purposes have been reduced by the tax benets from employee
stock options. The Company receives an income tax benet calculated as the difference between the fair market value of the stock issued
at the time of exercise and the option price, tax effected. The net tax benets from employee stock option transactions were $454 million,
$35 million, and $537 million for scal 2006, 2005, and 2004, respectively, and were reected as an increase to additional paid-in capital in
the Consolidated Statements of Shareholders’ Equity.
The Company’s federal income tax returns for scal years ended July 27, 2002 through July 31, 2004 are under examination by the
Internal Revenue Service. The Company believes that adequate amounts have been reserved for any adjustments which may ultimately
result from these examinations.
On October 22, 2004, the American Jobs Creation Act of 2004 (the “Jobs Creation Act”) was signed into law. The Jobs Creation Act
created a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends
received deduction for certain dividends from controlled foreign corporations. In scal 2006, the Company distributed cash from its foreign
subsidiaries and will report an extraordinary dividend (as dened in the Jobs Creation Act) of $1.2 billion and a related tax liability of
approximately $63 million in its scal 2006 federal income tax return. This amount was previously provided for in the provision for income taxes
and is included in income taxes payable. This distribution does not change the Company’s intention to indenitely reinvest undistributed
earnings of certain of its foreign subsidiaries in operations outside the United States.
Notes to Consolidated Financial Statements