8x8 2010 Annual Report Download - page 60

Effective April 1, 2007, the Company adopted the provisions of ASC 740 (formerly Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes: an Interpretation of FASB Statement No. 109”), which
clarifies the accounting and disclosure for uncertainty in income taxes recognized in an enterprise’s financial statements. As a
result of the implementation of ASC 740, the Company recognized no material adjustment to the April 1, 2007 balance of
retained earnings. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in
thousands):
2010 2009 2008
Balance at beginning of year $ 2,206 $ 2,122 2,044
Gross increases - tax position in prior period - - -
Gross decreases - tax position in prior period (586) (27) -
Gross increases - tax positions related to the current year 123 111 78
Settlements - - -
Lapse of statue of limitations - - -
Balance at end of yea
r
$ 1,743 $ 2,206 2,122
Unrecognized Tax Benefits
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $1.7 million, but any
affect would have been fully offset by the application of the valuation allowance. To the extent that the unrecognized tax
benefits are ultimately recognized, they may have an impact on the effective tax rate in future periods; however, such impact
on the effective tax rate would only occur if the recognition of such unrecognized tax benefits occurs in a future period when
the Company has already determined that its deferred tax assets are more likely than not realizable. The Company does not
expect the unrecognized tax benefits to change significantly over the next 12 months.
The Company files U.S. federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The
Company has not been under examination by income tax authorities in federal, state or other foreign jurisdictions. The 1995
through fiscal 2010 tax years generally remain subject to examination by federal and most state tax authorities. In significant
foreign jurisdictions, the fiscal year 2007 through 2010 tax years remain subject to examination by their respective tax
authorities.
The Company's policy for recording interest and penalties associated with audits is to record such items as a component of
operating expense income before taxes. During the fiscal year ended March 31, 2010 and 2009, the Company did not recognize
any interest or penalties related to unrecognized tax benefits.
Undistributed earnings of the Company’s foreign subsidiaries are indefinitely reinvested in foreign operations. No provision
has been made for taxes that might be payable upon remittance of such earnings, nor is it practicable to determine the amount
of this liability.
3. COMMITMENTS AND CONTINGENCIES
Guarantees
Indemnifications
In the normal course of business, the Company may agree to indemnify other parties, including customers, lessors and parties
to other transactions with the Company, with respect to certain matters such as breaches of representations or covenants or
intellectual property infringement or other claims made by third parties. These agreements may limit the time within which an
indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification
agreements with its officers and directors.
It is not possible to determine the maximum potential amount of the Company’s exposure under these indemnification
agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each
particular agreement. Historically, payments made by the Company under these agreements have not had a material impact on
the Company’s operating results, financial position or cash flows. Under some of these agreements, however, the Company’s
potential indemnification liability might not have a contractual limit.
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