Nautilus 2004 Annual Report Download - page 22

Table of Contents
Income Tax Provision
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Inherent in the measurement of these deferred balances are certain judgments and interpretations of existing tax law and other published
guidance as applied to our operations. When it is more likely than not that all or some portion of specific deferred tax assets will not be
realized, a valuation allowance must be established for the amount of the deferred tax assets that are determined not to be realizable. No
valuation allowance has been provided for deferred tax assets, since we anticipate the full amount of these assets should be realized in the
future. Accordingly, if the Company’s facts or financial results were to change thereby impacting the likelihood of realizing the deferred tax
assets, judgment would have to be applied to determine changes to the amount of the valuation allowance required to be in place on the
financial statements in any given period.
As a matter of course, the Company may be audited by federal, state and foreign tax authorities. We provide reserves for potential
exposures when we consider it probable that a taxing authority may take a sustainable position on a matter contrary to our position. We
evaluate these reserves, including interest thereon, on a quarterly basis to insure that they have been appropriately adjusted for events that may
impact our ultimate payment for such exposures. Management believes that an appropriate liability has been established for estimated
exposures; however, actual results may differ materially from these estimates. To the extent the audits or other events result in a material
adjustment to the accrued estimates, the effect would be recognized in income tax expense (benefit) in the Consolidated Statement of Income in
the period of the event.
In 2004 the Company derived tax benefits from an exclusion provided under U.S. income tax laws with respect to certain extraterritorial
income attributable to foreign trading gross receipts (“FTGRs”). This exclusion was repealed as part of the American Jobs Creation Act of
2004 (the “AJCA”), which was enacted on October 22, 2004. The AJCA provides for a phase-out such that the exclusion for the Company’s
otherwise qualifying FTGRs generated in fiscal 2005 and 2006 will be limited to 80% and 60%, respectively. No exclusion will be available in
fiscal years 2007 and thereafter.
The AJCA also provides a deduction for income from qualified domestic production activities, which will be phased in from 2005
through 2010. Under the guidance in Financial Accounting Standards Board (“FASB”) Staff Positions (“FSP”) FAS 109-1, Application of
FASB Statement No. 109,
“Accounting for Income Taxes,” to the Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004
, the deduction will be treated as a “special deduction” as described in SFAS No. 109, “Accounting for Income
Taxes.” As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. The impact of this
deduction will be reported in the period in which the deduction is claimed on our tax return.
In 2005, the Company is evaluating the effects of indefinitely reinvesting undistributed earnings of our foreign subsidiaries. In prior
years, the Company provided U.S. deferred income taxes on all undistributed earnings from non
-US subsidiaries. We expect to complete our
evaluation in 2005.
RESULTS OF OPERATIONS
This MD&A should be read in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this
report. We believe that period-to-period comparisons of our operating results are not necessarily indicative of future performance. You should
consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies that operate in evolving markets. We
may not be able to
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