Circuit City 2007 Annual Report Download - page 23

We recognize deferred tax assets and liabilities for the effect of temporary differences between the book and tax bases of recorded assets and
liabilities and for tax loss carry forwards. The realization of net deferred tax assets is dependent upon our ability to generate sufficient future
taxable income. Where it is more likely than not that some portion or all of the deferred tax asset will not be realized, we have provided a
valuation allowance. If the realization of those deferred tax assets in the future is considered more likely than not, an adjustment to the deferred
tax assets would increase net income in the period such determination is made. In the event that actual results differ from these estimates or we
adjust these estimates in future periods, an adjustment to the valuation allowance may be required, which could materially affect our
consolidated financial position and results of operations.
Restructuring charges.
We have taken restructuring actions in the past, and may commence further restructuring activities which result in
recognition of restructuring charges. These actions require management to make judgments and utilize significant estimates regarding the nature,
timing and amounts of costs associated with the activity. When we incur a liability related to a restructuring action, we estimate and record all
appropriate expenses, including expenses for severance and other employee separation costs, facility consolidation costs (including estimates of
sublease income), lease cancellations, asset impairments and any other exit costs. Should the actual amounts differ from our estimates, the
amount of the restructuring charges could be impacted, which could materially affect our consolidated financial position and results of
operations.
Recently Adopted and Newly Issued Accounting Pronouncements
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This interpretation prescribes a
comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns. For those benefits to be recognized, a tax position must be more-likely-than-
not to be sustained upon
examination by taxing authorities. At January 1, 2007, the Company had a liability for unrecognized tax benefits of $3,379,000 (including
interest and penalties of $731,000) of which $283,000 was charged to retained earnings at January 1, 2007. Of this total, $2,586,000 (net of the
federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective
income tax rate in any future periods.
The Company or one of its subsidiaries file U.S. federal income tax returns and tax returns in various state and foreign jurisdictions in Canada
and Western Europe. The Company’
s U.S. federal income tax returns have been examined by the Treasury Department through 2001. State and
local tax returns have been examined through various dates from 2001 to 2005 with ongoing tax examinations pending in several states.
Included in the Company’s FIN 48 liability is a current liability of $2,264,000 for the expected taxes and interest and penalties relating to
pending state tax examinations involving disputed allocations of income; no issues have been raised to date with respect to the other pending
state tax examinations.
With the exception of the current liability of $2,264,000, the Company’s remaining tax liabilities and interest with respect to unrecognized tax
benefits have been reclassified to other non-current liabilities on the balance sheet because payment of cash is not anticipated within one year.
This amount at January 1, 2007 aggregates to approximately $1,115,000, including $305,000 for interest and penalties. The Company’s
continuing practice is to record interest and penalties related to tax positions in income tax expense in its consolidated statement of operations.
During 2007, the Company resolved a state tax issue by paying an assessment of approximately $1,901,000 (including $169,000 in interest) to a
state taxing authority. As of December 31, 2007 the Company’
s liability for unrecognized tax benefits was approximately $1,547,000 (including
interest and penalties of approximately $632,000).
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