Hasbro 2012 Annual Report Download - page 53

Income Taxes
The Company’s annual income tax rate is based on its income, statutory tax rates, changes in prior tax
positions and tax planning opportunities available in the various jurisdictions in which it operates. Significant
judgment and estimates are required to determine the Company’s annual tax rate and in evaluating its tax
positions. Despite the Company’s belief that its tax return positions are fully supportable, these positions are
subject to challenge and estimated liabilities are established in the event that these positions are challenged and
the Company is not successful in defending these challenges. These estimated liabilities are adjusted, as well as
the related interest, in light of changing facts and circumstances, such as the progress of a tax audit.
An estimated effective income tax rate is applied to the Company’s interim results. In the event there is a
significant unusual or extraordinary item recognized in the Company’s interim results, the tax attributable to that
item is separately calculated and recorded at the time. Changes in the Company’s estimated effective income tax
rate during 2012 were primarily due to changes in its estimate of earnings by tax jurisdiction. In addition,
changes in judgment regarding likely outcomes related to tax positions taken in a prior fiscal year, or tax costs or
benefits from a resolution of such positions would be recorded entirely in the interim period the judgment
changes or resolution occurs. During 2012, the Company recorded a total benefit of approximately $8,300
associated with discrete tax events, primarily related to the repatriation of certain highly taxed foreign earnings as
well as expirations of statutes in multiple jurisdictions.
In certain cases, tax law requires items to be included in the Company’s income tax returns at a different
time than when these items are recognized on the financial statements or at a different amount than that which is
recognized on the financial statements. Some of these differences are permanent, such as expenses that are not
deductible on the Company’s tax returns, while other differences are temporary and will reverse over time, such
as depreciation expense. These differences that will reverse over time are recorded as deferred tax assets and
liabilities on the consolidated balance sheet. Deferred tax assets represent deductions that have been reflected in
the financial statements but have not yet been reflected in the Company’s income tax returns. Valuation
allowances are established against deferred tax assets to the extent that it is determined that the Company will
have insufficient future taxable income, including capital gains, to fully realize the future deductions or capital
losses. Deferred tax liabilities represent expenses recognized on the Company’s income tax return that have not
yet been recognized in the Company’s financial statements or income recognized in the financial statements that
has not yet been recognized in the Company’s income tax return. Deferred income taxes have not been provided
on most of the undistributed earnings of international subsidiaries as most of such earnings are indefinitely
reinvested by the Company. In the event the Company determines that such earnings will not be indefinitely
reinvested, it would be required to accrue for any additional income taxes representing the difference between the
tax rates in the United States and the applicable tax of the international subsidiaries. At December 30, 2012, the
difference between the tax rates in the United States and the applicable tax of the international subsidiaries on
cumulative undistributed earnings was approximately $393,000.
The Mexican government has a tax structure which results in companies paying the higher of an income-
based tax or an alternative flat tax. Should the Company be subject to the alternative flat tax, it would be required
to review whether its net deferred tax assets would be realized. As the Company believes that it will continue to
be subject to the income-based tax in 2013, it believes that the net deferred tax assets related to the Mexican tax
jurisdiction will be realizable. Should the facts and circumstances change, the Company may be required to
reevaluate deferred tax assets related to its Mexican operations, which may result in additional tax expense. At
December 30, 2012, these deferred tax assets were approximately $7,300.
43