Digital River 2006 Annual Report Download - page 98

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant
components of deferred income taxes are as follows (in thousands):
2006 2005
As Restated(1)
Deferred tax assets:
Net operating loss and credit carryforwards ....................... $30,302 $ 48,353
Nondeductible reserves and accruals ............................ 6,123 2,854
Depreciation and amortization ................................. 4,522 5,475
Valuation allowance ........................................ (12,960) (17,504)
Total deferred tax assets ..................................... 27,987 39,178
Deferred tax liabilities:
Depreciation .............................................. — (788)
Other intangibles. . . ........................................ (7,540) (5,706)
Total deferred tax liabilities ................................... (7,540) (6,494)
Net deferred tax assets ...................................... $20,447 $ 32,684
(1) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial
Statements.
As of December 31, 2006, we had net U.S. tax loss carryforwards of approximately $61.6 million and
foreign tax loss carryforwards of $1.3 million. The U.S. amount consists of $30.0 million of deductions
resulting from exercise of stock options and $31.6 million of acquired net operating losses. The U.S. tax loss
carryforwards expire in the years 2020 through 2025.
In prior years, there was uncertainty of future realization of the deferred tax assets resulting from
temporary differences and from tax loss carryforwards from operations and stock option deductions, therefore
a valuation allowance equal to the deferred tax assets was recorded. At December 31, 2005, we evaluated our
deferred tax assets related to tax loss carryforwards from stock option deductions and other items and
concluded it was more likely than not that the deferred tax assets would be realized, and accordingly the
valuation allowance was reversed. The reversal of the valuation allowance increased additional paid-in-capital
by approximately $28.0 million and decreased income tax expense by approximately $7.1 million.
We also have evaluated our deferred tax assets related to acquired operating losses and we believe a full
valuation allowance for these assets is required as it is not more likely than not that the deferred tax assets
will be realized. This valuation allowance is due to anticipated limitations on acquired losses, including
limitations under Section 382 of the Internal Revenue Code. Any future release of this valuation allowance
will reduce goodwill.
In accordance with SFAF 123(R), which we adopted January 1, 2006, tax savings from expected future
deductions based on the expense attributable to our stock option plans are reflected in the U.S. tax provisions
for 2006 and 2005. They were not reflected in the provision for 2004.
No provision has been made for federal income taxes on approximately $25.8 million of our foreign
subsidiaries undistributed earnings since we plan to indefinitely reinvest all such earnings. If these earnings
were distributed to the U.S. in the form of dividends or otherwise, then we would be subject to U.S. income
taxes on such earnings. The amount of U.S. income taxes would be subject to adjustment for foreign tax
credits and for the impact of the step-up in the basis of assets resulting from a Section 338 election made at
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DIGITAL RIVER, INC.
Notes to Consolidated Financial Statements — (Continued)