Xerox 2006 Annual Report Download - page 93

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per-share data and unless otherwise indicated)
The $343 benefit also includes after-tax benefits of
$83 related to the favorable resolution of certain other tax
matters. Of this amount, $53 was related to previously
discontinued operations and is reported within Income
from discontinued operations in the Consolidated
Statements of Income.
Deferred Income Taxes
In substantially all instances, deferred income taxes
have not been provided on the undistributed earnings of
foreign subsidiaries and other foreign investments carried
at equity. The amount of such earnings included in
consolidated retained earnings at December 31, 2006 was
approximately $7 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 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, 2006 and 2005 were as follows (in millions):
2006 2005
Tax effect of future tax deductions
Research and development ...... $1,133 $1,173
Post-retirement medical
benefits ................... 576 478
Depreciation ................. 261 271
Net operating losses ........... 553 480
Other operating reserves ........ 197 307
Tax credit carryforwards ....... 354 346
Deferred compensation ......... 232 185
Allowance for doubtful
accounts .................. 108 118
Restructuring reserves ......... 70 69
Pension ..................... 300 32
Other ....................... 129 134
3,913 3,593
Valuation allowance ............... (647) (590)
Total deferred tax assets .......... $3,266 $3,003
2006 2005
Tax effect of future taxable income
Unearned income and
installment sales ........... $(1,277) $(1,303)
Other ..................... (31) (42)
Total deferred tax liabilities ........ (1,308) (1,345)
Total deferred taxes, net ......... $ 1,958 $ 1,658
The above amounts are classified 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, 2006 and
2005 amounted to $271 and $290, 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, 2005 was $567. The
net change in the total valuation allowance for the years
ended December 31, 2006 and 2005 was an increase of
$57 and an increase of $23, 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 a valuation 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.
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