Pizza Hut 2007 Annual Report Download - page 75

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The details of 2007 and 2006 deferred tax assets (liabilities)
are set forth below:
2007 2006
Net operating loss and tax credit carryforwards $ 363 $ 337
Employee benefits, including share-based
compensation 209 189
Self-insured casualty claims 73 85
Lease related liabilities 115 95
Various liabilities 124 92
Deferred income and other 36 66
Gross deferred tax assets 920 864
Deferred tax asset valuation allowances (308) (345)
Net deferred tax assets $ 612 $ 519
Intangible assets and property, plant and
equipment $ (156) $ (149)
Lease related assets (41) (23)
Other (58) (55)
Gross deferred tax liabilities (255) (227)
Net deferred tax assets (liabilities) $ 357 $ 292
Reported in Consolidated Balance Sheets as:
Deferred income taxes—current $ 125 $ 57
Deferred income taxes—long-term 290 320
Accounts payable and other current liabilities (8) (8)
Other liabilities and deferred credits (50) (77)
$ 357 $ 292
We have not provided deferred tax on certain undistributed
earnings from our foreign subsidiaries as we believe they are
indefinitely reinvested. This amount may become taxable upon
an actual or deemed repatriation of assets from the subsidiar-
ies or a sale or liquidation of the subsidiaries. We estimate
that our total net undistributed earnings upon which we have
not provided deferred tax total approximately $810 million at
December 29, 2007. A determination of the deferred tax liability
on such earnings is not practicable. Foreign operating and capital
loss carryforwards totaling $705 million and state operating loss
carryforwards totaling $1.1 billion at year end 2007 are being
carried forward in jurisdictions where we are permitted to use tax
losses from prior periods to reduce future taxable income. These
losses will expire as follows: $27 million in 2008, $113 million
between 2009 and 2012, $1.1 billion between 2013 and 2027
and $601 million may be carried forward indefinitely. In addition,
tax credits totaling $99 million are available to reduce certain fed-
eral and state liabilities, of which $26 million will expire between
2009 and 2012, $66 million will expire between 2013 and 2027
and $7 million may be carried forward indefinitely.
Effective December 31, 2006, we adopted FIN 48 which
requires that a position taken or expected to be taken in a tax
return be recognized in the financial statements when it is more
likely than not (i.e. a likelihood of more than fifty percent) that the
position would be sustained upon examination by tax authorities.
A recognized tax position is then measured at the largest amount
of benefit that is greater than fifty percent likely of being realized
upon settlement. Upon adoption, we recognized an additional
$13 million for unrecognized tax benefits, which we accounted for
as a reduction to our opening balance of retained earnings.
The Company had $376 million of unrecognized tax benefits
at December 29, 2007, $194 million of which,if recognized, would
affect the effective income tax rate. A reconciliation of the begin-
ning and ending amount of unrecognized tax benefits follows:
2007
Balance upon adoption at December 31, 2006 $ 318
Additions on tax positions related to the current year 105
Additions for tax positions of prior years 17
Reductions for tax positions of prior years (49)
Reductions for settlements (6)
Reductions due to statute expiration (11)
Foreign currency translation adjustment 2
Balance at December 29, 2007 $ 376
The balance of unrecognized tax benefits previously disclosed
upon adoption as of December 31,2006 increased from $283 mil-
lion to $318 million as a result of additional uncertain temporary
tax positions identified in 2007. These unrecognized tax benefits
were properly recorded on our Consolidated Balance Sheet at
December 31, 2006, but were not identified as uncertain tax
positions for disclosure purposes. As these items were tempo-
rary in nature, there was no change to the disclosed amount of
$185 million of unrecognized tax benefits which, if recognized,
would affect the effective income tax rate.
The major jurisdictions in which the Company files income
tax returns include the U.S. federal jurisdiction, China, the United
Kingdom, Mexico and Australia. As of December 29, 2007, the
earliest years that the Company was subject to examination in
these jurisdictions were 1999 in the U.S., 2004 in China, 2000
in the United Kingdom, 2001 in Mexico and 2003 in Australia.
In addition, the Company is subject to various U.S. state income
tax examinations, for which, in the aggregate, we had significant
unrecognized tax benefits at December 29, 2007. The Company
believes that it is reasonably possible that its unrecognized tax
benefits may decrease by approximately $110 million in the next
12 months. Of this amount, approximately $95 million relates
to items temporary in nature which will have no impact on the
2008 effective tax rate. The remaining $15 million decrease in
unrecognized tax benefits relate to various positions, each of
which are individually insignificant, which if recognized upon audit
settlement or statute expiration, will affect the effective income
tax rate by approximately $12 million.
At December 29, 2007, long-term liabilities of $319 mil-
lion, including $51 million for the payment of accrued interest
and penalties, are included in Other liabilities and deferred
credits as reported on the Consolidated Balance Sheet. Total
accrued interest and penalties recorded at December 29, 2007
were $58 million. During 2007, accrued interest decreased by
$16 million, of which $11 million affected the 2007 effective
tax rate. The Company recognizes accrued interest and penal-
ties related to unrecognized tax benefits as components of its
income tax provision.
See Note 22 for further discussion of certain proposed Inter-
nal Revenue Service adjustments.