Rosetta Stone 2015 Annual Report Download - page 36

Table of Contents
Other related costs generally include external consulting and legal costs associated with the strategic shift in business focus of our Consumer business.
Such costs are recognized at fair value in the period in which the costs are incurred.
Income Taxes
We believe that the accounting estimate for the realization of deferred tax assets is a critical accounting estimate because judgment is required in
assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns. Although it is possible there will
be changes that are not anticipated in our current estimates, we believe it is unlikely such changes would have a material period-to-period impact on our
financial position or results of operations.
We use the asset and liability approach to accounting for income taxes. Deferred tax assets and liabilities represent the future tax consequences of the
differences between the financial statement carrying amounts of assets and liabilities versus the tax bases of assets and liabilities. Under this method, deferred
tax assets are recognized for deductible temporary differences, and operating loss and tax credit carryforwards. Deferred tax liabilities are recognized for
taxable temporary differences.
We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that such
assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed quarterly based on the more-likely-than-
not realization threshold criterion. In the assessment, appropriate consideration is given to all positive and negative evidence related to the realization of the
deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future
profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring unused, and tax
planning alternatives. Significant judgment is required to determine whether a valuation allowance is necessary and the amount of such valuation allowance,
if appropriate. The valuation allowance is reviewed quarterly and is maintained until sufficient positive evidence exists to support a reversal.
In assessing the recoverability of our deferred tax assets, we consider all available evidence, including:
• the nature, frequency, and severity of cumulative financial reporting losses in recent years;
• the carryforward periods for the net operating loss, capital loss, and foreign tax credit carryforwards;
• predictability of future operating profitability of the character necessary to realize the asset;
• prudent and feasible tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax assets; and
• the effect of reversing taxable temporary differences.
The evaluation of the recoverability of the deferred tax assets requires that we weigh all positive and negative evidence to reach a conclusion that it is
more likely than not that all or some portion of the deferred tax assets will not be realized. The weight given to the evidence is commensurate with the extent
to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support
a conclusion that a valuation allowance is not needed. Our valuation allowance analysis considers a number of factors, including our cumulative losses in
recent years, our expectation of future taxable income and the time frame over which our net operating losses expire.
As of December 31, 2015, a full valuation allowance exists for the U.S., Japan, China, Hong Kong, Mexico, Spain, Brazil, and France where we have
determined the deferred tax assets will not more likely than not be realized.
All of the jurisdictions mentioned above, with the exception of China, have cumulative losses and pre-tax losses for the most recent year ended
December 31, 2015. The establishment of a valuation allowance has no effect on the ability to use the deferred tax assets in the future to reduce cash tax
payments. We will continue to assess the likelihood that the deferred tax assets will be realizable at each reporting period and the valuation allowance will be
adjusted accordingly, which could materially affect our financial position and results of operations.
As of December 31, 2015 and 2014, our net deferred tax liability was $5.0 million and $4.2 million, respectively.
Recently Issued Accounting Standards
For a summary of recent accounting pronouncements applicable to our consolidated financial statements see Note 2 of Item 8, 
, which is incorporated herein by reference.
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