THQ 2007 Annual Report Download - page 38

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Thefollowing tablesetsforth theamountof stock-based compensation expense recognizedinfiscal2007,
2006 and 2005 (in thousands):
Year Ended March31,
2007 2006 2005
Cost of sales—software amortization androyalties. ...... $2,087 $—$—
Product development................................3,364 926 475
Sellingandmarketing ................................2,817 981 132
Generaland administrative ...........................10,704 1,515 199
Total stock-based compensation expense.............$18,972 $3,422 $806
Income taxes. As part of the process of preparing ourconsolidated financial statements, we are required
to estimateour income taxesin each of thejurisdictions in which we operate. This process involves:
(1) estimating our current tax exposure in each jurisdiction including the impact, if any, of changes or
interpretations to applicable taxlaws andregulations, (2) estimating additionaltaxesresulting from tax
examinations and(3) making judgments regarding the recoverability of deferred taxassets. To theextent
recovery of deferred taxassetsisnot likelybased on ourestimatesoffuturetaxable income in each
jurisdiction, a valuation allowance is established.
Thecalculation of our tax liabilities involves dealing with uncertainties in the application of complex tax
regulations. We recognize liabilities for anticipated taxaudit issues in the U.S. and other tax jurisdictions
based on our estimate of whether, and the extent to which, additional taxes will be due. Our estimate for
thepotential outcome for any uncertain tax issue, including our recent claim for research and development
income taxcredits, requires judgment. We believe we have adequately provided for any reasonably
foreseeable outcome relatedto these matters. However, our future results may include favorableor
unfavorable adjustments to our estimated tax liabilities in theperiod the assessments are made or resolved
or when statutes of limitation on potential assessments expire.
As of March 31, 2007, the non-current portion of income taxreceivable is recorded net of a$17.0 million
contingent tax liability. The contingent tax liability relatesto tax positions taken in previously filed tax
returnsand similar positions expected to be taken in ourcurrent year tax returns. Moreover, the Internal
Revenue Service (“IRS”) has commenced aroutineexamination of our U.S. income taxreturns for the
calendar year 1999 through fiscal year 2004. A portion of thecontingent taxliability relates to thefiscal
years under examination. On May 24, 2007 we received notification from the IRS that theJoint Committee
on Taxation had completed its review of our file andtook no exception to the conclusions reached by the
IRS. The conclusions reached by the IRSwerenot significantly different from thepositions taken on our
tax returns. We areevaluatingtheimpact the conclusions of the IRS examination has on the measurement
of our contingent tax liabilities and will make any necessary adjustments in the quarter endingJune 30,
2007. Theamount of tax benefit recognized may be impacted by ouradoption of FIN 48, which is effective
forus as of April 1, 2007.
As a result of the items discussed above, our actual effective income tax rates can differ from theprojected
effective income tax rates used when preparing our consolidated financial statements.
Recently Issued Accounting Pronouncements
In February 2006, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 155,
“Accountingfor Certain HybridFinancial Instruments” (“FAS 155”), an amendment of SFAS No. 133,
“Accountingfor Derivative Instrumentsand HedgingActivities”, and SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“FAS 140”), allowing
companies to elect fair value measurement for instruments in their entirety in cases otherwise requiring a
derivative to be bifurcated. FAS 155 is effective for all financial instrumentsacquired or issuedin fiscal
years beginningafter September15, 2006, which will be our fiscal year 2008. We do not expect the