Xerox 2010 Annual Report Download - page 97

Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
95Xerox 2010 Annual Report
The tax effects of temporary differences that give rise to significant
portions of the deferred taxes at December 31, 2010 and 2009 were
as follows:
2010 2009
Deferred Tax Assets:
Research and development $ 855 $ 752
Post-retirement medical benefits 373 421
Depreciation 200 246
Net operating losses 634 576
Other operating reserves 172 261
Tax credit carryforwards 409 525
Deferred compensation 340 233
Allowance for doubtful accounts 97 93
Restructuring reserves 78 16
Pension 437 403
Other 156 132
Subtotal 3,751 3,658
Valuation allowance (735) (672)
Total $ 3,016 $ 2,986
Deferred Tax Liabilities:
Unearned income and installment sales $ (1,025) $ (996)
Intangibles and goodwill (1,207) (154)
Other (54) (38)
Total $ (2,286) $ (1,188)
Total Deferred Taxes, Net $ 730 $ 1,798
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, 2010 and 2009
amounted to $298 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 net change in the total valuation
allowance for the years ended December 31, 2010 and 2009 was an
increase of $63 and a increase of $44, 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.
Included in the balances at December 31, 2010, 2009 and 2008 are
$39, $67 and $67, respectively, of tax positions that are highly certain of
realizability but for which there is uncertainty about the timing or may
be reduced through an indirect benefit from other taxing jurisdictions.
Because of the impact of deferred tax accounting, other than for the
possible incurrence of interest and penalties, the disallowance of these
positions would not affect the annual effective tax rate.
We have filed claims in certain jurisdictions to assert our position should
the law be clarified by judicial means. At this point in time, we believe
it is unlikely that we will receive any benefit from these types of claims
but we will continue to analyze as the issues develop. Accordingly, we
have not included any benefit for these types of claims in the amount of
unrecognized tax benefits.
We recognized interest and penalties accrued on unrecognized tax
benefits, as well as interest received from favorable settlements within
income tax expense. We had $31, $13 and $22 accrued for the payment
of interest and penalties associated with unrecognized tax benefits at
December 31, 2010, 2009 and 2008, respectively.
We file income tax returns in the U.S. federal jurisdiction and various
foreign jurisdictions. In the U.S., with the exception of ACS, we are no
longer subject to U.S. federal income tax examinations for years before
2007. ACS is no longer subject to such examinations for years before
2004. With respect to our major foreign jurisdictions, we are no longer
subject to tax examinations by tax authorities for years before 2000.
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 at
December 31, 2010 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.