Computer Associates 2006 Annual Report Download - page 153

Note 8 — Income Taxes (Continued)
2006 2005
Year Ended
March 31,
(restated)
(In millions)
Deferred tax liabilities:
Modified accrual basis accounting . . . ............................... — 35
Purchased software ............................................. 76 166
Other intangible assets........................................... 150 87
Capitalized development costs ..................................... 76 60
Foreign unremitted earnings to be repatriated .......................... — 55
Total deferred tax liabilities ......................................... 302 403
Net deferred tax asset ............................................. $300 $ 33
Worldwide net operating losses (NOLs) totaled approximately $866 million and $451 million as of March 31, 2006
and 2005, respectively. These NOLs expire between 2007 and 2026. In management’s judgment, the total deferred
tax assets of $602 million for certain acquisition liabilities, NOLs, and other deferred tax assets, will more likely
than not be realized as reductions of future taxable income or by utilizing available tax planning strategies. The
valuation allowance increased $52 million and $42 million in March 31, 2006 and 2005, respectively. The change in
the valuation allowance primarily relates to acquired NOLs and NOLs in foreign jurisdictions that more likely than
not in management’s judgment will not be realized. Additionally, approximately $57 million and $28 million of the
valuation allowance as of March 31, 2006 and March 31, 2005, respectively, is attributable to acquired NOLs which
are subject to annual limitations under IRS Code Section 382. The valuation allowance related to the acquired
NOLs, if realized, will first reduce any remaining goodwill and then any remaining other non-current intangible
assets.
The Company is subject to tax in many jurisdictions and a certain degree of estimation is required in recording
assets and liabilities related to income taxes. Management believes that adequate provision has been made for any
adjustments that may result from tax examinations. The outcome of tax examinations, however, cannot be predicted
with certainty as tax matters could be subject to differing interpretations of applicable tax laws and regulations as
they relate to the amount, timing or inclusion of revenue and expenses or the sustainability of income tax credits for
a given audit cycle. The Company has established a liability of $236 million related to these matters. Should any
issues addressed in the Company’s tax audits be resolved in a manner not consistent with management’s
expectations, the Company could be required to adjust its provision for income tax in the period such
resolution occurs.
The income tax benefit recorded for the fiscal year ended March 31, 2006 includes benefits of approximately
$51 million arising from the recognition of certain foreign tax credits, $18 million arising from international stock
based compensation deductions and $66 million arising from foreign export benefits and other international tax rate
benefits. Partially offsetting these benefits was a charge of approximately $46 million related to additional tax
reserves.
During the fourth quarter of fiscal year 2006, the Company repatriated approximately $584 million from foreign
subsidiaries. Total taxes related to the repatriation were approximately $55 million. The repatriation was initially
planned in fiscal year 2005 in response to the favorable tax benefits afforded by the American Jobs Creation Act of
2004 (AJCA), which introduced a special one-time dividends received deduction on the repatriation of certain
foreign earnings to a U.S. taxpayer (repatriation provision), provided that certain criteria were met. During fiscal
year 2005, we recorded an estimate of this tax charge of $55 million based on an estimated repatriation amount up to
$500 million. In the first quarter of fiscal year 2006, we recorded a benefit of approximately $36 million reflecting
the Department of Treasury and IRS Notice 2005-38 issued on May 10, 2005. In the fourth quarter of fiscal year
2006, the Company finalized its estimates of tax liabilities and determined that an adjustment was necessary and,
accordingly, recorded an additional tax charge in the amount of $36 million. As a result of this complex tax matter,
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