THQ 2006 Annual Report Download - page 75

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Deferred income taxes reflect the net tax effects of temporary differences between the amounts of assets
and liabilities for accounting purposes and the amounts used for income tax purposes. The components of
the net deferred income tax asset and liability are as follows (in thousands):
March 31,
2006 2005
Deferred income tax assets:
Accruals, reserves and other expenses..................... $27,225 $22,364
Tax credit carryforwards ................................. 10,123 —
Net operating loss carryforwards .......................... 4,8551,328
State income tax ........................................ —1,382
Total................................................ 42,203 25,074
Valuationallowance.................................... (5,576 )(2,158 )
Deferred taxasset, net of valuation allowance............ 36,627 22,916
Deferred income tax liabilities:
Software development costs.............................. 42,422 26,019
Depreciation andamortization ........................... 4,441 5,122
Unrealized gain on marketable equity securities ............ 1,6321,290
Other................................................. 1,982 1,792
Total................................................ 50,477 34,223
Net deferred tax liability ............................... $13,850 $11,307
As of March 31, 2006, net deferred tax liabilities of $3.6 million and $10.3 million were classified as current
and long-term liabilities, respectively. As of March31, 2005, net deferred tax liabilities of$6.8 million and
$4.5 million were classified as current and long-term liabilities, respectively. The non-current portion of
income tax receivable is recorded net of an $11.8 million contingent tax liability. The contingent tax
liability relates to tax positions taken in previously filed tax returns and similar positions expected to be
taken in our current year tax returns. Moreover, the IRS has commenced a routine examination of our
U.S. income tax returns for the fiscal years 2003 and 2004. A portion of the contingent tax liability relates
to the fiscal years under examination. While the ultimate resolution of tax audits involves a degree of
uncertainty, we believe that adequate tax accruals have been provided for any adjustments that are
expected to result for these years.
The tax credit carryforwards as of March 31, 2006 includes research and development tax credit
carryforwards of $4.2 million and $5.9 million for federal and California purposes, respectively. The federal
tax credit carryforward expires in 2025, while the California tax credit can be carried forward indefinitely.
As of March 31, 2006, we have various state net operating loss carryforwards totaling $17.0 million that
expire between 2008 and 2013 and foreign net operating loss carryforwards totaling $15.0 million that can
be carried forward indefinitely. At March 31, 2006, our deferred income tax asset for net operating loss
carryforwards was reduced by a valuation allowance of $3.9 million as compared to $330,000 inthe prior
fiscal year. Realization of the deferred tax assets is dependent upon the continued generation of sufficient
taxable income prior to the expiration of the net operating loss carryforwards. Although realization is not
assured, management believes it is more likely than not that the net carrying value of the deferred tax asset
will be realized.
The tax benefits associated with certain net operating loss carryovers relate to employee stock options.
Pursuant to SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), net operating losses have
been reduced by $15.7 million relating to these items which will be credited to additional paid-in capital
when realized.