Harman Kardon 2011 Annual Report Download - page 96

The deferred tax assets for the respective periods were assessed for recoverability and, where applicable, a
valuation allowance was recorded to reduce the total deferred tax asset to an amount that will, more likely than
not, be realized in the future. The net change in the total valuation allowance for the year ended June 30, 2011
was a increase of $0.6 million. At June 30, 2011, the valuation allowance is comprised of $125.7 million
recorded against deferred tax assets for U.S. foreign tax credits; $31.4 million recorded against state deferred tax
assets and $2.3 million recorded against foreign loss carryforwards. At June 30, 2010, the valuation allowance is
comprised of $125.7 million recorded against deferred tax assets for U.S. foreign tax credits; $32.2 million
recorded against state deferred tax assets and $0.8 million recorded against foreign loss carryforwards.
Although realization is not assured, we have concluded that it is more likely than not that the deferred tax
assets for which a valuation allowance was determined to be unnecessary, will be realized in the ordinary course
of operations based on the available positive and negative evidence including the utilization of taxable temporary
differences, projected income from operations and tax planning strategies that could be implemented, if
necessary, to prevent a carryforward from expiring. The amount of the net deferred tax assets considered
realizable, however, could be reduced in the future if projected income is lower than estimated, or if there are
differences in the timing or amount of future reversals of existing taxable or deductible temporary differences.
As of June 30, 2011, the deferred tax assets for tax credit carryforwards are comprised of U.S. foreign tax
credits in the amount of $185.5 million with an expiration period between 2013 through 2020; U.S. Federal and
state research and experimentation credits in the amount of $55.2 million, $40.0 million with an expiration period
between 2014 through 2031 and $15.2 million with no expiration; U.S. Federal AMT credits of $1.5 million that
have no expiration period; and $3.4 million of state enterprise credits with an expiration period between 2012
through 2013.
As of June 30, 2011, the deferred tax asset for deferred interest and loss carryforwards are comprised of
foreign deferred interest carryforwards of $13.1 million with no expiration period; foreign net operating loss
carryforward of $30.0 million with no expiration period and U.S. Federal and state net operating loss
carryforwards of $3.8 million with an expiration period of 2014 through 2029.
As of June 30, 2011, we have approximately $628 million of unremitted foreign earnings. U.S. deferred
taxes have not been provided on approximately $527 million because these earnings are intended to be
permanently reinvested. Such earnings would be subject to U.S. taxation if repatriated to the U.S. The
determination of the amount of unrecognized deferred tax liability associated with the permanently reinvested
cumulative undistributed earnings is not practicable.
The tax expense within discontinued operations for fiscal year 2010 includes an expense of $35 million
relating to tax on previously permanently reinvested earnings. We intend to repatriate a portion of these earnings,
as a result of the sale of the QNX Entities and therefore have recorded a deferred income tax liability associated
with the eventual repatriation to the U.S. in a subsequent period.
Our operations are subject to ongoing tax examinations in various jurisdictions. Significant judgment is
required in determining our annual tax expense and in evaluating our tax positions. Accordingly, we have
established reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine
that the positions become uncertain based upon one of the following: (1) the tax position is not more likely than
not to be sustained, (2) the tax position is more likely than not to be sustained, but for a lesser amount, or (3) the
tax position is more likely than not to be sustained, but not in the financial period in which the tax position was
originally taken. For purposes of evaluating whether or not a tax position is uncertain, (1) we presume the tax
position will be examined by the relevant taxing authority that has full knowledge of all relevant information,
(2) the technical merits of a tax position are derived from authorities such as legislation and statutes, regulations,
rulings and case law, and (3) each tax position is evaluated without consideration of the possibility of offset or
aggregation with other tax positions taken. We adjust these reserves, including an impact on the related interest
and penalties, in light of changing facts and circumstances, such as the progress of a tax audit.
78