IBM 2006 Annual Report Download - page 95

Black
MAC
390 CG10
DEFERRED TAX ASSETS
(Dollars in millions)
AT DECEMBER 31: 2006 2005*
Stock-based and other compensation $ , $ ,
Retirement-related benefits , ,
Capitalized research and development , ,
Bad debt, inventory and warranty reserves  
Deferred income  
Foreign tax loss carryforwards  
Domestic tax loss carryforwards  
Capital loss carryforwards  
Alternate minimum tax credits — 
Other , ,
Gross deferred tax assets , ,
Less: valuation allowance  
Net deferred tax assets $, $,
* Reclassified to conform with 2006 presentation.
DEFERRED TAX LIABILITIES
(Dollars in millions)
AT DECEMBER 31: 2006 2005
Retirement-related benefits $, $ ,
Leases , 
Software development costs  
Other , ,
Gross deferred tax liabilities $, $,
The valuation allowance at December 31, 2006, principally applies
to certain foreign, state and local and capital loss carryforwards that,
in the opinion of management, are more likely than not to expire
unutilized. However, to the extent that tax benefits related to these
carryforwards are realized in the future, the reduction in the valua-
tion allowance will reduce income tax expense.
In December 2006, the company and the IRS reached resolution
of the company’s U.S. income tax audit for 2001 through 2003. The
settlement of this audit resulted in a decrease in the 2006 effective
tax rate of 3 points due to the release of previously recorded tax
reserves. The company also expects to receive an immaterial tax
refund for these years.
In the fourth quarter of 2006, as a continuation of its global strat-
egy, the company aligned, through an intercompany transfer, certain
non-U.S. intellectual property rights with existing non-U.S. rights
currently owned by one of the company’s non-U.S. manufacturing
subsidiaries. This transfer resulted in a one-time increase in the 2006
effective tax rate of 4 points.
For income tax return purposes, the company has foreign, domes-
tic and capital loss carryforwards, the tax effect of which is $820
million. Substantially all of these carryforwards are available for at
least two years or are available for 10 years or more.
With limited exception, the company is no longer subject to U.S.
federal, state and local or non-U.S. income tax audits by taxing
authorities for years through 2000. The years subsequent to 2000
contain matters that could be subject to differing interpretations of
applicable tax laws and regulations as it relates to the amount and/or
timing of income, deductions and tax credits. Although the outcome
of tax audits is always uncertain, the company believes that adequate
amounts of tax and interest have been provided for any adjustments
that are expected to result for these years.
The company has not provided deferred taxes on $14.2 billion of
undistributed earnings of non-U.S. subsidiaries at December 31, 2006,
as it is the company’s policy to indefinitely reinvest these earnings in
non-U.S. operations. However, the company periodically repatriates a
portion of these earnings to the extent that it does not incur an addi-
tional U.S. tax liability. Quantification of the deferred tax liability, if
any, associated with indefinitely reinvested earnings is not practicable.
For additional information on the trends related to the company’s
ongoing effective tax rate, as well as the company’s cash tax rate, refer
to the “Looking Forward” section of the Management Discussion
on page 43.
Q. RESEARCH, DEVELOPMENT
AND ENGINEERING
RD&E expense was $6,107 million in 2006, $5,842 million in 2005
and $5,874 million in 2004.
The company incurred expense of $5,682 million in 2006, $5,379
million in 2005 and $5,339 million in 2004 for scientific research and
the application of scientific advances to the development of new and
improved products and their uses, as well as services and their applica-
tion. Of these amounts, software-related expense was $2,842 million,
$2,689 million and $2,626 million in 2006, 2005 and 2004, respectively.
Included in the expense was a charge of $7 million and $1 million in
2006 and 2005, respectively, for acquired in-process R&D.
Expense for product-related engineering was $425 million, $463
million and $535 million in 2006, 2005 and 2004, respectively.
R. 2005 ACTIONS
In May 2005, management announced its plans to implement a
series of restructuring actions designed to improve the company’s
efficiencies, strengthen its client-facing operations and capture oppor-
tunities in high-growth markets. The company’s actions primarily
included voluntary and involuntary workforce reductions, with the
majority impacting the Global Services segments, primarily in Europe,
as well as costs incurred in connection with the vacating of leased
facilities. These actions were in addition to the company’s ongoing
workforce reduction and rebalancing activities that occur each quarter.
The total charges expected to be incurred in connection with all sec-
ond-quarter 2005 initiatives is approximately $1,757 million ($1,747
million of which has been recorded cumulatively through December
31, 2006) . Approximately $1,625 million of the total charges require
cash payments, of which approximately $1,368 million have been made
as of December 31, 2006 and $92 million are expected to be made over
the next 12 months.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
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