D-Link 2004 Annual Report Download - page 55

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27
D-LINK CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
(7) As of the December 31, 2004, the ROC income tax authorities had examined and assessed the
income tax returns of D-Link for all fiscal years through December 31, 2002, except 2000 and
2001.
D-Link disagreed with the assessments made by the tax authorities for its 1999 and 2002 income
tax returns regarding tax exemption, a research and development tax credit, etc. As of December
31, 2004, the related appeals had not been approved by the tax authorities (please see note 20).
(8) In 1998, an integrated income tax system was implemented in the ROC. Under the new tax
system, the income tax paid at the corporate level can be used to offset the ROC resident
stockholders’ individual income tax. D-link and its subsidiaries in the ROC are required to
establish an imputation credit account (“ICA”) to maintain a record of the corporate income taxes
paid and imputation credit that can be allocated to each stockholder. The credit available to the
ROC resident stockholders is calculated by multiplying the dividend by the creditable ratio. The
creditable ratio is calculated as the balance of the ICA divided by earnings retained since January
1, 1998.
Information relating to the ICA of D-Link as of December 31, 2003 and 2004, is summarized as
follows:
December 31,
2003 2004
Unappropriated retained earnings:
Earned prior to January 1, 1998 $ 194,476 194,476
Earned after December 31, 1997 1,529,590 2,734,784
Total $ 1,724,066 2,929,260
ICA balance $ 97,462 81,792
Expected creditable ratio for earnings distribution to
resident stockholders
13.87%
(actual)
12.46%
(estimated)
17. Financial Instruments
(1) Derivative financial instruments
D-Link, Alpha and DTI used foreign currency option contracts and forward foreign currency
exchange contracts to hedge existing assets and liabilities denominated in foreign currencies.
The counter-parties of the derivative contracts are reputable financial institutions. Therefore,
management believes that the risk of default by the counter-parties is remote.