Adaptec 2003 Annual Report Download - page 31

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Provision for Income Taxes.
Our annual effective tax rate for the year ended December 31, 2003 was a recovery of 49.6% (2002 – 22.5%, 2001 – 2.7%) compared
to a statutory tax rate of 35%. Our increased effective tax rate reflects an additional recovery of prior year taxes and tax credits
received by our Canadian subsidiary for research and development expenses incurred. We are able to recover taxes and tax credits,
through cash payments we receive from the Canadian government, for our Canadian tax losses against amounts paid in taxes in the
prior three years. As we last paid tax in Canada in 2000, this is the last year we are able to recover taxes paid when we have losses,
until we are profitable and pay taxes again in the future.
Our annual effective tax rate for the year ended December 31, 2002 was a recovery of 22.5%. Excluding the effects of
non−deductible amortization of purchased intangibles and deferred stock compensation, and incremental taxes on foreign earnings, the
effective income tax rate for 2002 was a recovery of 24.1% compared to the statutory tax rate of 35%. Our effective tax rate was
lower than the statutory rate as a result of a valuation allowance provided on deferred tax assets, where likelihood of realization is
uncertain.
Our annual effective tax rate for the year ended December 31, 2001 was a recovery of 2.7%. Excluding the effects of non−deductible
goodwill, deferred stock compensation amortization, impairment of purchased intangibles, and incremental taxes on foreign earnings,
the effective income tax rate for 2001 was a recovery of 21.7% compared to the statutory tax rate of 35%. Our effective tax rate was
lower than the statutory rate for the same reason as in 2002.
See Note 12 to the Consolidated Financial Statements for additional information regarding income taxes.
Critical Accounting Policies and Estimates
General
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial
Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported by us of
assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on
historical experience and on various other assumptions that are reasonable in the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
Our significant accounting policies are outlined in Note 1 to the Consolidated Financial Statements. In management’s opinion the
following critical accounting policies require the most significant judgment and involve complex estimation. We also have other
policies that we consider to be key accounting policies, such as our policies of revenue recognition, including the deferral of revenues
on sales to major distributors; however these policies do not meet the definition of critical accounting estimates as they do not
generally require us to make estimates or judgments that are difficult or subjective.
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