Creative 2008 Annual Report Download - page 38

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38
NOTES฀TO฀CONSOLIDATED฀FINANCIAL฀STATEMENTS
NOTE 11 – INCOME TAXES (Cont’d)
Deferred tax liabilities at June 30, 2008 and 2007 consisted of the following (in US$’000):
฀As฀of฀June฀30
฀ 2008฀ 2007
Unremitted฀offshore฀interest฀income฀ $฀ 7,745฀ $฀ 6,600
Undistributed฀profit฀of฀certain฀foreign฀subsidaries฀ ฀ 6,299฀ ฀ 6,144฀
Others฀ ฀ 4,000฀ ฀ 2,655
Total฀deferred฀tax฀liabilities฀$฀ 18,044฀$฀ 15,399฀
Creative had net operating loss carryforward of approximately $194.7 million and $174.8 million as at June 30, 2008 and
June 30, 2007, the bulk of which expire between 2009 and 2029. The utilization of the net operating losses by Creative
is subject to certain conditions.
Valuation allowance is provided for Creative’s deferred tax assets as management believes substantial uncertainty exists
regarding the realizability of these assets.
Creative has United States tax deductions not included in the net operating loss carryforward described above aggregating
approximately $60.9 million at June 30, 2008 and June 30, 2007, as a result of the exercise of employee stock options,
the tax benefit of which has not been realized. The tax benefit of the deductions, when realized will be accounted for as
a credit to other reserves rather than a reduction of the income tax provision.
Creative adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109” (“FIN 48”), effective July 1, 2007. FIN 48 contains a two-step approach to recognize and measure
uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available
evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related
appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more
than 50% likely of being realized upon ultimate settlement.
Prior to adoption of FIN 48, Creative provided for tax exposures as part of its income taxes payable. As a result of the
adoption of FIN 48, certain of the payables were reclassified from income taxes payable to the opening balance of FIN 48
liabilities. A reconciliation of the unrecognized tax benefits is as follows (in US$’000):
As฀of฀June฀30
฀ 2008
Balance฀at฀July฀1,฀2007฀ $฀ 11,056
Increase฀related฀to฀current฀year฀tax฀positions฀ ฀ 646
฀
Balance฀at฀June฀30,฀2008฀ $฀ 11,702
The liability of $11.7 million for the uncertain tax positions at June 30, 2008 is related to estimated transfer pricing in
various jurisdictions, and withholding tax payments. This amount, if recognized, would affect Creative’s effective tax rate
favorably.