Virgin Media 2012 Annual Report Download - page 111

F-40
the most recent three year period, we believe that the available positive evidence outweighs the remaining negative
evidence. Therefore, we determined that it was appropriate to reverse substantially all of the valuation allowance on
our U.K. deferred tax assets other than capital losses. The reversal of the valuation allowance on our U.K. deferred
tax assets resulted in an income tax benefit of £2,488.9 million, or £9.07 per basic share and £7.52 per diluted share
during the year ended December 31, 2012, and an increase in current and non-current deferred tax assets on the
consolidated balance sheet for the year ended December 31, 2012. Beginning in the first quarter of 2013, we expect
our net income and earnings per share to be impacted to a greater degree by income tax expense, which may fluctuate
from period to period. However, this reversal will not result in any change to the amount of cash payments to the U.K.
tax authorities for income taxes.
Realization of our deferred tax assets is dependent on generating sufficient taxable income in future periods. Although
we believe it is more likely than not that future taxable income will be sufficient to allow us to recover substantially all
of the value of our U.K. deferred tax assets other than capital losses, realization is not assured and future events could
cause us to change our judgment. If future events cause us to conclude that it is not more likely than not that we will
be able to recover all of the value of our deferred tax assets we would be required to establish a valuation allowance
on our deferred tax assets at that time, which would result in a charge to income tax expense and a material decrease
in net income in the period in which we change our judgment.
During 2012, we also reversed a valuation allowance on the U.S. deferred tax assets related to certain of our subsidiaries
that are considered dual resident in the U.K. and U.S. for tax purposes, and recognized a benefit of £103.4 million.
The assets in these companies are principally comprised of NOLs. The companies have emerged from a cumulative
loss position and after consideration of all available positive and negative evidence we believe it is more likely than
not that the deferred tax assets will be utilized. Because those companies have emerged from a cumulative loss
position, significant negative evidence no longer exists. Positive evidence exists in the form of recent profitability,
forecasts for continued profitability, and long expiration periods for the NOLs. We do not require significant improvements
in the level of profitability to utilize the deferred tax assets prior to their expiration.
We continue to maintain a full valuation allowance on our U.S. deferred tax assets related to companies included in
our U.S. consolidated federal income tax return, because we do not believe it is more likely than not that we will be
able to realize the value of these assets. We are in a cumulative loss position over the most recent three year period
in the U.S., and we expect that position to continue into the future, principally because all of our revenue is generated
in the U.K. We also continue to maintain a full valuation allowance on our deferred tax assets relating to capital losses,
which totaled approximately £2,786.1 million as of December 31, 2012. We do not expect to realize any significant
benefit from these capital losses because they can only be used to the extent we generate future U.K. taxable capital
gains from assets held by subsidiaries owned prior to 2006.
We have considered the implications of the proposed merger with Liberty Global, as discussed in Subsequent Events
in Note 18, on our accounting for our deferred tax assets. We note that a change in judgment that results in subsequent
recognition, derecognition, or change in measurement of a tax position taken in a prior annual period shall be recognized
as a discrete item in the period in which the change occurs. We are therefore not permitted to consider the impact of
the proposed business combination until 2013 and the partial reversal of the allowance discussed above therefore
remains appropriate.
Changes in tax laws and rates will also affect our deferred tax assets in the future. The U.K. government has announced
a reduction in the rate of corporation tax from 23% to 21%. These reductions have not been enacted, but we will
recognize a reduction in the value of our deferred tax assets and liabilities and a charge to income tax expense in the
period of enactment which is expected to be during 2013.
Table of Contents
VIRGIN MEDIA INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 11—Income Taxes (continued)