Xerox 2005 Annual Report Download - page 86

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per-share data and unless otherwise indicated)
78
Deferred Income Taxes
In substantially all instances, deferred income taxes have not
been provided on the undistributed earnings of foreign subsidi-
aries and other foreign investments carried at equity. The amount
of such earnings included in consolidated retained earnings at
December 31, 2005 was approximately $6.5 billion. These
earnings have been indefinitely reinvested and we currently do not
plan to initiate any action that would precipitate the payment of
income taxes thereon. It is not practicable to estimate the amount
of additional tax that might be payable on the foreign earnings.
Our March 31, 2001 sale of half of our ownership interest in Fuji
Xerox resulted in our investment no longer qualifying as a foreign
corporate joint venture. Accordingly, deferred taxes are required
to be provided on the undistributed earnings of Fuji Xerox, arising
subsequent to such date, as we no longer have the ability to
ensure indefinite reinvestment.
The tax effects of temporary differences that give rise to
significant portions of the deferred taxes at December 31, 2005
and 2004 wereas follows (in millions):
2005 2004
Tax effect of futuretax deductions
Research and development $ 1,173 $ 1,281
Post-retirement medical benefits 478 499
Depreciation 271 247
Net operating losses 480 450
Other operating reserves 307 333
Tax credit carryforwards 346 289
Deferred compensation 185 198
Allowance for doubtful accounts 118 149
Restructuring reserves 69 43
Other 166 40
3,593 3,529
Valuation allowance (590) (567)
Total Deferred tax assets $ 3,003 $ 2,962
Tax effect of future taxable income
Unearned income and installment sales $ (1,303) $(1,293)
Other (42) (79)
Total Deferred tax liabilities (1,345) (1,372)
Total Deferred taxes, net $ 1,658 $ 1,590
The above amounts areclassified as current or long-term in
the Consolidated Balance Sheets in accordance with the asset
or liability to which they relate or, when applicable, based on
the expected timing of the reversal. Current deferred tax assets
at December 31, 2005 and 2004 amounted to $290 and
$289, respectively.
The deferred tax assets for the respective periods were assessed
for recoverability and, where applicable, a valuation allowance
was recorded to reduce the total deferred tax asset to an amount
that will, more likely than not, be realized in the future. The
valuation allowance for deferred tax assets as of January 1, 2004
was $577. The net change in the total valuation allowance for the
years ended December 31, 2005 and 2004 was an increase of
$23 and a decrease of $10, respectively. The valuation allowance
relates primarily to certain net operating loss carryforwards,
tax credit carryforwards and deductible temporary differences
for which we have concluded it is more likely than not that these
items will not be realized in the ordinary course of operations.
Although realization is not assured, we have concluded that it
is more likely than not that the deferred tax assets for which
avaluation allowance was determined to be unnecessary will
be realized in the ordinary course of operations based on the
available positive and negative evidence, including scheduling
of deferred tax liabilities and projected income from operating
activities. The amount of the net deferred tax assets considered
realizable, however, could be reduced in the near term if actual
future income or income tax rates are lower than estimated, or
if there are differences in the timing or amount of future reversals
of existing taxable or deductible temporary differences.
At December 31, 2005, we had tax credit carryforwards of
$346 available to offset future income taxes, of which $247 are
available to carryforwardindefinitely while the remaining $99 will
begin to expire, if not utilized, in 2006. Wealso had net operating
loss carryforwards for income tax purposes of $225 that will
expirein 2006 through 2024, if not utilized, and $2.2 billion
available to offset futuretaxable income indefinitely.
Note 16 – Contingencies
Guarantees, Indemnifications and Warranty Liabilities: Guarantees
and claims arise during the ordinary course of business from
relationships with suppliers, customers and nonconsolidated
affiliates when the Company undertakes an obligation to
guarantee the performance of others if specified triggering
events occur.Nonperformance under a contract could trigger
an obligation of the Company. These potential claims include
actions based upon alleged exposures to products, real estate,
intellectual property such as patents, environmental matters and
other indemnifications. The ultimate effect on future financial
results is not subject to reasonable estimation because con-
siderable uncertainty exists as to the final outcome of these
claims. However, while the ultimate liabilities resulting from such
claims may be significant to results of operations in the period
recognized, management does not anticipate they will have a
material adverse effect on the Company’s consolidated financial
position or liquidity.As of December 31, 2005, we have accrued
our estimate of liability incurred under our indemnification
arrangements and guarantees.
Xerox Annual Report 2005