Square Enix 2006 Annual Report Download - page 62

S Q U A R E E N IX C O . , L T D .
Income tax expenses are as follows:
Thousands of
Years ended March 31 Millions of yen U.S. dollars
2006 2005 2004 2006
Current: ¥(00,923 ¥11,267 ¥(3,600 $(007,857
Domestic (638) 10,350 1,723 (5,434)
Foreign 1,561 917 1,877 13,291
Deferred: ¥(12,534) ¥ (1,612) ¥(1,168) $(106,699)
Domestic (11,982) (1,807) (1,234) (101,999)
Foreign (552) 195 66 (4,700)
Total ¥(11,611) ¥09,655 ¥(2,432 $0(98,842)
The differences between the provision for income taxes and
the income taxes computed using Japan statutory tax rate to
pretax income as a percentage of pretax income are as follows:
Years ended March 31 2006 2005 2004
Statutory tax rate (% ) 40.70% 40.70% 42.05%
Tax rate difference from foreign
consolidated affiliates —(1.23) (2.29)
Effect of tax rate change —(0.86) (0.22)
Dividend received deduction (602.92) ——
Valuation allowance 175.04 ——
Investment tax credit (29.14) (0.58) (2.19)
Impairment charge for goodwill and
intangible assets 42.20 ——
Reversal of valuation allowance on
deferred tax assets —— (3.50)
Others 3.14 1.72 (1.88)
Income tax expense (% ) (370.98)% 39.75% 31.97%
The components of the deferred tax assets and liabilities as
of March 31, 2006 and 2005 consist of the following:
Thousands of
Millions of yen U.S. dollars
2006 2005 2006
Deferred tax assets:
Software development costs ¥00,641 ¥00,951 $005,457
Accrued paid absence 281 134 2,453
Accrued pension costs 1,548 500 13,223
Enterprise tax payable 38 810 323
Prepaid expenses —310 —
Accrued bonus 709 416 6,035
Reserve for sales return and price
protection 358 442 3,048
Accrued expense and other 180 366 1,536
Investment securities 339 934 2,888
Investment tax credit —80 —
Net operating loss 16,867 —143,589
(Less valuation allowance) (7,206) —(61,247)
Other 2,384 747 20,096
Gross deferred tax assets ¥16,139 ¥05,690 $137,401
Deferred tax liabilities:
Software development costs —¥00,968 —
Fixed assets ¥14,650 13,752 $124,716
Valuation gain on investment
securities 365 324 3,106
Other 59 127 504
Gross deferred tax liabilities ¥15,074 ¥15,171 $128,326
Net deferred tax assets (liabilities) ¥01,065 ¥ (9,481) $009,075
On April 1st, 2003, the acquisition of Square took place in
the form of a qualified non-taxable merger. Accordingly, the
tax attributes to produce future tax deduction in the amount
of ¥9,867 million were transferred, without limitation, to the
Company. It included pre-merger net operating loss carryfor-
wards (NOLs) and the deductible temporary difference that
arose from a past write-off of a depreciable motion picture film
in the amount of ¥1,661 million and ¥2,211 million, respec-
tively. Transferred pre-merger NOLs were fully utilized in the
year ended March 31, 2004.
Following the acquisition of 93.7% of outstanding shares of
Taito (“ Old Taito” ) in September 2005, the Company engaged
in the minority cash-out transaction by means of a forward tri-
angular merger so as for Old Taito to become a wholly owned
subsidiary of the Company. “ SQEX” , another wholly owned
subsidiary of the Company, was used for a vehicle of merger.
Upon consummation of the merger, surviving SQEX was
renamed “ Taito Corporation (“ New Taito” )” . The merger was
taxable for Japanese tax purposes. Accordingly, tax basis of
assets of Old Taito transferred to New Taito were stepped up to
their respective fair values, and New Taito recognized goodwill
in its balance sheet in the amount of ¥26,686 million, which
was tax deductible over 5 years on a straight-line basis. New
Taito deducted from income an amortization of goodwill,
currently in the taxable year of 2006, which resulted in NOL of
¥4,873 million for tax purposes subject to carry-forward of 7
years over next taxable year. Also, in the course of merger, the
Company, as one of the Old Taito’s shareholders, received from
Old Taito the merger consideration in total amount of ¥63,292
million.Whereas the receipt of consideration was eliminated in
consolidation for financial reporting purposes and had no effect
to the consolidated financial statement of income for the year
of 2006, a portion thereof was deemed comprised of the
receipt of constructive dividend and the incurrence of capital
loss in the same amount of ¥46,364 million for tax purposes.
Because constructive dividend is subject to dividend received
deduction (“ DRD” ) for tax purposes, DRD offset the income of
the Company to the extent of its income before DRD, currently
in the taxable year of 2006. The unused portion of DRD resulted
in NOL of ¥36,586 million, which was carried forward to next
7 years.
At March 31, 2006, the U.S. subsidiary has NOLs and research
and development credits (R&D credits) for federal income tax
purposes of approximately $27.75 million and $0.74 million,
expiring beginning in 2022 and 2019, respectively. Utilization
of NOLs and R&D credits has certain limitations.
At March 31, 2006, the Chinese subsidiaries have NOLs
and tax credits for Chinese tax purposes of approximately
13,150 million RMB and 0.223 million RMB, expiring beginning
in 2010, respectively. Utilization of NOLs and tax credits has
certain limitations.