Adaptec 2005 Annual Report Download - page 50

Table of Contents
different than the United States federal statutory tax rate. A significant portion of our net loss for 2006 consisted of expenses that have no associated tax benefits
due to their non-deductibility and the fact that deferred tax assets primarily relating to the operating loss carryforwards in the U.S. are fully offset by a valuation
allowance. These expenses include amortization of non-deductible intangible assets and in-process research and development, and stock-based compensation.
Our effective tax rate in all years presented reflects recoveries and refunds of prior year taxes paid and tax credits received by our Canadian subsidiary for
research and development expenses incurred, offset by valuation allowances on losses carried forward.
Our estimated tax provision rate increased significantly at the end of 2006 due to an increase in our estimated tax liability following receipt in 2007 of a written
communication from a tax authority examining the historical transfer pricing policies and practices of certain companies within the PMC-Sierra group. As a
result, we increased our provision for periods prior to 2006 by $29.9 million. We recorded $7.1 million tax expense in the first quarter of 2006 for withholding
and other taxes on the repatriation of funds used to purchase the Storage Semiconductor Business and recorded $3.8 million in net deferred tax expense
associated with both of the acquisitions of the Storage Semiconductor Business and Passave, Inc.
See Note 14 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 we report as assets, liabilities, revenue and expenses, and the 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. These estimates
could change 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.
Valuation of Goodwill and Intangible Assets
The purchase method of accounting for acquisitions requires estimates and assumptions to allocate the purchase price to the fair value of net tangible and
intangible assets acquired, including in-process research and development (IPR&D). The amounts allocated to IPR&D are expensed immediately. The amounts
allocated to, and the useful lives estimated for, other
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Source: PMC SIERRA INC, 10-K, February 22, 2008