Foot Locker 2011 Annual Report Download - page 75

FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Income Taxes − (continued)
Based upon the level of historical taxable income and projections for future taxable income, which are
based upon the Company’s strategic long-range plans, over the periods in which the temporary differences
are anticipated to reverse, management believes it is more likely than not that the Company will realize the
benefits of these deductible differences, net of the valuation allowances at January 28, 2012. However, the
amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of
taxable income are revised.
At January 28, 2012, the Company has state operating loss carryforwards with a potential tax benefit of
$11 million that expire between 2012 and 2030. The Company will have, when realized, a capital loss with
a potential benefit of $3 million arising from a note receivable. This loss will carryforward for 5 years after
realization. The Company has U.S. state and Canadian provincial credit carryforwards that total $2 million,
expiring between 2012 and 2021. The Company has international operating loss carryforwards with a
potential tax benefit of $2 million, expiring between 2012 and 2031.
At January 28, 2012 and January 29, 2011, the Company had $65 million and $62 million, respectively of
gross unrecognized tax benefits, and $64 million and $61 million, respectively, of net unrecognized tax
benefits that would, if recognized, affect the Company’s annual effective tax rate. The Company has
classified certain income tax liabilities as current or noncurrent based on management’s estimate of when
these liabilities will be settled. Interest expense and penalties related to unrecognized tax benefits are
classified as income tax expense. The Company recognized $1 million of interest expense in each of 2011,
2010, and 2009. The total amount of accrued interest and penalties was $4 million, $3 million, and
$5 million in 2011, 2010, and 2009, respectively.
The following table summarizes the activity related to unrecognized tax benefits:
2011 2010 2009
(in millions)
Unrecognized tax benefits at beginning of year $ 62 $ 70 $ 58
Foreign currency translation adjustments (1) 3 6
Increases related to current year tax positions 7 4 4
Increases related to prior period tax positions 1 3 4
Decreases related to prior period tax positions — (7) (2)
Settlements (3) (9) —
Lapse of statute of limitations (1) (2) —
Unrecognized tax benefits at end of year $ 65 $ 62 $ 70
It is reasonably possible that the liability associated with the Company’s unrecognized tax benefits will
increase or decrease within the next twelve months. These changes may be the result of foreign currency
fluctuations, ongoing audits or the expiration of statutes of limitations. Settlements could increase earnings
in an amount ranging from $0 to $5 million based on current estimates. Audit outcomes and the timing of
audit settlements are subject to significant uncertainty. Although management believes that adequate
provision has been made for such issues, the ultimate resolution of these issues could have an adverse
effect on the earnings of the Company. Conversely, if these issues are resolved favorably in the future, the
related provision would be reduced, generating a positive effect on earnings. Due to the uncertainty of
amounts and in accordance with its accounting policies, the Company has not recorded any potential
impact of these settlements.
55