HP 2007 Annual Report Download - page 53

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
share-based payment awards represent management’ s best estimates, but these estimates involve inherent uncertainties and
the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based
compensation expense could be materially different in the future. In addition, we are required to estimate the expected
forfeiture rate and recognize expense only for those shares expected to vest. If our actual forfeiture rate is materially different
from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the
current period. See Note 2 to the Consolidated Financial Statements in Item 8 for a further discussion on stock-based
compensation.
Taxes on Earnings
We calculate our current and deferred tax provisions based on estimates and assumptions that could differ from the
actual results reflected in our income tax returns filed during the subsequent year. We record adjustments based on filed
returns when we have identified and finalized them, which is generally in the third and fourth quarters of the subsequent year
for U.S. federal and state provisions, respectively.
We recognize deferred tax assets and liabilities for the expected tax consequences of temporary differences between the
tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which we expect
the differences to reverse. We record a valuation allowance to reduce the deferred tax assets to the amount that we are more
likely than not to realize. We have considered future market growth, forecasted earnings, future taxable income, the mix of
earnings in the jurisdictions in which we operate and prudent and feasible tax planning strategies in determining the need for
a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net deferred
tax assets in the future, we would increase the valuation allowance and make a corresponding charge to earnings in the period
in which we make such determination. Likewise, if we later determine that we are more likely than not to realize the net
deferred tax assets, we would reverse the applicable portion of the previously provided valuation allowance. In order for us to
realize our deferred tax assets we must be able to generate sufficient taxable income in the tax jurisdictions in which the
deferred tax assets are located.
Our effective tax rate includes the impact of certain undistributed foreign earnings for which we have not provided U.S.
taxes because we plan to reinvest such earnings indefinitely outside the United States. We plan foreign earnings remittance
amounts based on projected cash flow needs as well as the working capital and long-term investment requirements of our
foreign subsidiaries and our domestic operations. Based on these assumptions, we estimate the amount we will distribute to
the United States and provide the U.S. federal taxes due on these amounts. Further, as a result of certain employment actions
and capital investments HP has undertaken, income from manufacturing activities in certain countries is subject to reduced
tax rates, and in some cases is wholly exempt from taxes, for fiscal years through 2019. Material changes in our estimates of
cash, working capital and long-term investment requirements in the various jurisdictions in which we do business could
impact our effective tax rate.
We are subject to income taxes in the United States and over sixty foreign countries, and we are subject to routine
corporate income tax audits in many of these jurisdictions. We believe that our tax return positions are fully supported, but
tax authorities are likely to challenge certain positions, which may not be fully sustained. However, our income tax expense
includes amounts intended to satisfy income tax assessments that result from these challenges. Determining the income tax
expense for these potential assessments and recording the related assets and liabilities requires significant management
judgments and estimates. We evaluate our income tax contingencies in accordance with SFAS No. 5,
39