Foot Locker 2010 Annual Report Download - page 70

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At January 29, 2011, the Company has foreign tax credit carryforwards totaling $9 million that expire
between 2018 and 2019. The Company also has state operating loss carryforwards with a potential tax benefit of
$16 million that expire between 2011 and 2030. The Company will have, when realized, a capital loss with a
potential benefit of $3 million arising from a note receivable. This loss will carryforward for 5 years after
realization. The Company has U.S. state and Canadian provincial credit carryforwards that total $2 million,
expiring between 2011 and 2020. The Company has international operating loss carryforwards with a potential
tax benefit of $1 million, expiring between 2011 and 2030.
The Company had $70 million of gross unrecognized tax benefits and $68 million of net unrecognized tax
benefits, as of the beginning of the year. The Company has classified certain income tax liabilities as current or
noncurrent based on management’s estimate of when these liabilities will be settled. Interest expense and
penalties related to unrecognized tax benefits are classified as income tax expense. The Company recognized
$1 million of interest expense in each of 2010, 2009, and 2008. The total amount of accrued interest and
penalties was $3 million in 2010 and $5 million in 2009.
The following table summarizes the activity related to unrecognized tax benefits:
(in millions)
Balance as of January 30, 2010 ........................................ $70
Foreign currency translation adjustments ................................. 3
Increases related to current year tax positions.............................. 4
Increases related to prior period tax positions .............................. 3
Decreases related to prior period tax positions.............................. (7)
Settlements .................................................... (9)
Lapse of statute of limitations ........................................ (2)
Balance as of January 29, 2011 ........................................ $62
Of the unrecognized tax benefits, $61 million would, if recognized, affect the Company’s annual effective tax
rate. It is reasonably possible that the liability associated with the Company’s unrecognized tax benefits will
increase or decrease within the next twelve months. These changes may be the result of foreign currency
fluctuations, ongoing audits or the expiration of statutes of limitations. Settlements could increase earnings in
an amount ranging from $0 to $5 million based on current estimates. Audit outcomes and the timing of audit
settlements are subject to significant uncertainty. Although management believes that adequate provision has
been made for such issues, the ultimate resolution of these issues could have an adverse effect on the earnings of
the Company. Conversely, if these issues are resolved favorably in the future, the related provision would be
reduced, generating a positive effect on earnings. Due to the uncertainty of amounts and in accordance with its
accounting policies, the Company has not recorded any potential impact of these settlements.
18. Financial Instruments and Risk Management
The Company operates internationally and utilizes certain derivative financial instruments to mitigate its
foreign currency exposures, primarily related to third party and intercompany forecasted transactions. As a result
of the use of derivative instruments, the Company is exposed to the risk that counterparties will fail to meet their
contractual obligations. To mitigate the counterparty credit risk, the Company has a policy of entering into
contracts only with major financial institutions selected based upon their credit ratings and other financial
factors. The Company monitors the creditworthiness of counterparties throughout the duration of the derivative
instrument. Additional information is contained within Note 19, Fair Value Measurements.
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