Cincinnati Bell 2009 Annual Report Download - page 113

the Company analyzes a variety of factors including market data, estimated future cash flows of the acquired
operations, industry growth rates, current replacement cost for fixed assets, and market rate assumptions for
contractual obligations. Such a valuation requires management to make significant estimates and assumptions,
especially with respect to the intangible assets. In addition, contingent consideration will be presented at fair
value of the date of acquisition and transaction costs will be expensed as incurred.
Changes to the assumptions the Company used to estimate fair value could impact the recorded amounts for
acquired assets and liabilities, including property, plant and equipment, intangible assets, and goodwill.
Significant changes to these balances could have a material impact on the Company’s future reported results.
Accounting for Taxes
Income Taxes
The income tax provision consists of an amount for taxes currently payable and an amount for tax
consequences deferred to future periods. The Company’s previous tax filings are subject to normal reviews by
regulatory agencies until the related statute of limitations expires.
As of December 31, 2009, the Company had $477.5 million in net deferred income taxes, which includes
approximately $1.1 billion of federal tax net operating loss carryforwards with a deferred tax asset value of
approximately $393.7 million. The federal tax loss carryforwards are available to the Company to offset taxable
income in current and future periods. The majority of the remaining tax loss carryforwards will expire between
2021 and 2023 and are not currently limited under U.S. tax laws. The ultimate realization of the deferred income
tax assets depends upon the Company’s ability to generate future taxable income during the periods in which
basis differences and other deductions become deductible and prior to the expiration of the net operating loss
carryforwards. Based on current income levels and anticipated future reversal of existing temporary differences,
the Company expects to utilize its federal net operating loss carryforwards within their expiration periods.
In addition to the federal tax net operating loss carryforwards, the Company has state and local net operating
loss carryforwards with a deferred tax asset value of approximately $60.6 million, alternative minimum tax credit
carryforwards of approximately $14.4 million, and deferred tax temporary differences and other tax attributes of
approximately $76.0 million. A valuation allowance of $67.2 million is provided at December 31, 2009 against
certain state and local net operating losses and other deferred tax assets due to the uncertainty of the Company’s
ability to utilize the assets within the statutory expiration period.
The Company determines the effective tax rate by dividing income tax expense by income before taxes as
reported in its Consolidated Statement of Operations. For reporting periods prior to the end of the Company’s
fiscal year, the Company records income tax expense based upon an estimated annual effective tax rate. This rate
is computed using the statutory tax rate and an estimate of annual net income adjusted for an estimate of
non-deductible expenses.
The Company adopted the provisions of ASC 740, “Income Taxes,” on January 1, 2007. As a result of the
implementation of ASC 740, the Company recognized a $5.1 million increase in the liability for unrecognized
tax benefits, which was accounted for as an increase to the January 1, 2007 accumulated deficit balance. At
December 31, 2009 and 2008, the Company had a $16.7 million and a $15.6 million liability recorded for
unrecognized tax benefits, respectively. The total amount of unrecognized tax benefits that, if recognized, would
affect the effective tax rate is $16.4 million. The Company does not currently anticipate that the amount of
unrecognized tax benefits will change significantly over the next year.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state
and local jurisdictions. With a few exceptions, the Company is no longer subject to U.S. federal, state or local
examinations for years before 2006.
The Company recognizes accrued penalties related to unrecognized tax benefits in income tax expense. The
Company recognizes accrued interest related to unrecognized tax benefits in interest expense. Accrued interest
and penalties are insignificant at December 31, 2009 and December 31, 2008.
Refer to Note 12 to the Consolidated Financial Statements for further information regarding the Company’s
income taxes.
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Form 10-K