Activision 2012 Annual Report Download - page 73

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On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law by the President of the United States. Under the
provisions of the American Taxpayer Relief Act of 2012, the research and development (“R&D”) tax credit that had expired December 31, 2011,
was reinstated retroactively to January 1, 2012, and is now scheduled to expire on December 31, 2013. The Company will record the impact of
the extension of the R&D tax credit related to the tax year ended December 31, 2012, as a discrete item the first quarter of 2013. The impact of
the extension of the R&D tax credit is expected to result in a tax benefit related to the tax year ended December 31, 2012.
Deferred income taxes reflect the net tax effects of temporary differences between the amounts of assets and liabilities for accounting
purposes and the amounts used for income tax purposes. The components of the net deferred tax assets (liabilities) are as follows (amounts in
millions):
As of December 31,
2012
2011
Deferred tax assets:
Reserves and allowances ........................................................................................................
$11
$20
Allowance for sales returns and price protection ................................................................
56
59
Inventory reserve ....................................................................................................................
5
2
Accrued expenses ...................................................................................................................
65
101
Deferred revenue ....................................................................................................................
357
330
Tax credit carryforwards ........................................................................................................
62
43
Net operating loss carryforwards ...........................................................................................
14
15
Stock-based compensation ................................................................................................
119
91
Foreign deferred assets ...........................................................................................................
7
16
Other ................................................................................................................................
2
5
Deferred tax assets.......................................................................................................................
698
682
Valuation allowance ....................................................................................................................
—
—
Deferred tax assets, net of valuation allowance ..........................................................................
698
682
Deferred tax liabilities:
Intangibles ..............................................................................................................................
(161)
(177)
Prepaid royalties .....................................................................................................................
—
(2)
Capitalized software development expenses .........................................................................
(54)
(33)
State taxes ...............................................................................................................................
(21)
(18)
Deferred tax liabilities .................................................................................................................
(236)
(230)
Net deferred tax assets .................................................................................................................
$462
$452
As of December 31, 2012, we have various state net operating loss carryforwards totaling $17 million which will begin to expire in
2013. These net operating loss carryforwards are not subject to limitations under Section 382 of the Internal Revenue Code, which imposes a
limitation on a corporation’s ability to utilize net operating losses if it experiences an ownership change, as defined under the Internal Revenue
Code. We have tax credit carryforwards of $6 million and $56 million for federal and state purposes, respectively, which will begin to expire in
2016.
Through our foreign operations, we have approximately $45 million in net operating loss carryforwards at December 31, 2012,
attributed mainly to losses in France and Ireland. We evaluate our deferred tax assets, including net operating losses and tax credits, to determine
if a valuation allowance is required. We assess whether a valuation allowance should be established or released based on the consideration of all
available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be
objectively verified. At December 31, 2012, there are no valuation allowances on deferred tax assets.
Realization of the U.S. deferred tax assets is dependent upon the continued generation of sufficient taxable income prior to expiration
of tax credits and loss carryforwards. Although realization is not assured, management believes it is more likely than not that the net carrying
value of the U.S. deferred tax assets will be realized.
Cumulative undistributed earnings of foreign subsidiaries for which no deferred taxes have been provided approximated
$1,978 million at December 31, 2012. Deferred income taxes on these earnings have not been provided as these amounts are considered to be
permanent in duration. It is not practical to estimate the amount of tax that would be payable upon distribution of these earnings.
On July 9, 2008, Activision Blizzard entered into a Tax Sharing Agreement (the “Tax Sharing Agreement”) with Vivendi. The Tax
Sharing Agreement generally governs Activision Blizzard’s and Vivendi’s respective rights, responsibilities and obligations with respect to the