THQ 2007 Annual Report Download - page 78

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Deferred income taxes reflect thenet tax effects of temporarydifferences between theamountsof assets
and liabilities for accountingpurposes andthe amounts used for income taxpurposes. The components of
the net deferred income taxasset andliability are as follows (in thousands):
March 31,
2007 2006
Deferred income taxassets:
Accruals, reserves andotherexpenses. .....................$29,080 $27,816
Taxcreditcarryforwards .................................22,371 10,123
Net operatingloss carryforwards ..........................5,513 4,855
Other..................................................2,859 —
Total................................................59,823 42,794
Valuationallowance .....................................(7,126) (5,576)
Deferred tax asset, net of valuation allowance. ............ 52,697 37,218
Deferred income tax liabilities:
Software development costs..............................60,207 42,422
Depreciation andamortization. ...........................2,065 4,441
Unrealizedgainon marketable equitysecurities............. 2601,632
Other..................................................—1,982
Total................................................62,532 50,477
Net deferred taxliability...............................$9,835$13,259
As of March 31,2007, current net deferred tax liabilities were $25.6 million and long term net deferred tax
assets were $15.8 million. As of March 31, 2006, net deferred tax liabilities of $3.6 million and$9.7 million
were classified as current and long-term liabilities, respectively. Thenon-current portion of income tax
receivable is recorded net of a $17.0 million contingent tax liability. The contingent tax liability relates to
taxpositions takenin previously filed tax returns and similar positions expected to be taken in our current
year taxreturns. Moreover, the Internal Revenue Service (“IRS”) has commenced a routine examination
of ourU.S. income taxreturns for thecalendar year 1999 through fiscal year 2004. A portion of the
contingent tax liability relates to thefiscal years under examination. On May 24, 2007we received
notification from the IRS that the Joint Committeeon Taxation had completed its review of our file and
took no exception to the conclusions reached by the IRS. The conclusions reached by the IRS were not
significantly different from the positions taken on our tax returns. We areevaluating theimpact the
conclusions of theIRSexamination has on themeasurement of our contingent tax liabilities and will make
any necessary adjustments in thequarter endingJune 30, 2007. The amount of tax benefit recognized may
be impacted by our adoption of FIN 48,which is effectivefor us as of April 1, 2007.
Thetax credit carryforwards as of March 31, 2007 includes research and development tax credit
carryforwards of $11.4 million and $11.6 million for federal and state purposes, respectively. The federal
taxcredit carryforward expires in 2026, while themajority of the state credits are from Californiaand can
be carried forward indefinitely. In addition, we have foreign tax credit carryforwards of $2.0 million. These
credits expire in 2017.
As of March 31, 2007, we have variousstate netoperatingloss carryforwards totaling$5.9 million that
expire between 2008 and 2026 and foreign netoperating loss carryforwards totaling$17.5 million that can
be carried forward indefinitely. At March 31, 2007, our deferred incometax asset for net operating loss
carryforwards was reduced by a valuation allowance of $5.2 millionascompared to $3.9 million in theprior
fiscal year. Realization of the deferred taxassets is dependent upon the continued generation of sufficient
taxable incomeprior to theexpiration of the net operatingloss carryforwards. Although realization is not
assured, management believesit is morelikelythan not that the net carrying value of thedeferred taxasset
will be realized.