CompUSA 2007 Annual Report Download - page 64

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income among various tax jurisdictions. We have established, and periodically reevaluate, an estimated
income tax reserve on our consolidated balance sheet to provide for the possibility of adverse outcomes in
income tax proceedings. While management believes that we have identified all reasonably identifiable
exposures and that the reserve we have established for identifiable exposures is appropriate under the
circumstances, it is possible that additional exposures exist and that exposures may be settled at amounts
different than the amounts reserved.
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