THQ 2008 Annual Report Download - page 86

compared to $7.1 million in the 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, we believe 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 carryforwards relate to employee stock options.
Pursuant to SFAS No. 109, ‘‘Accounting for Income Taxes’’ (‘‘FAS 109’’), current year net operating losses
have been reduced by $5.1 million relating to these items which will be credited to additional paid-in
capital when we can reduce our income taxes payable.
At March 31, 2008 we had accumulated foreign earnings of $66.5 million. We do not plan to repatriate
these earnings, therefore, no U.S. income tax has been provided on the foreign earnings. Additionally, we
have not tax effected the cumulative translation adjustment as we have no intention of repatriating foreign
earnings.
We adopted the provisions of FASB Interpretation 48, ‘‘Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109,’’ (‘‘FIN 48’’) on April 1, 2007. Previously, we had accounted for
tax contingencies in accordance with SFAS No. 5, Accounting for Contingencies. As required by FIN 48,
we recognize the financial statement benefit of a tax position only after determining that the relevant tax
authority would ‘‘more likely than not’’ sustain the position following an audit. For tax positions meeting
the more likely than not threshold, the amount recognized in the financial statements is the largest benefit
that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax
authority. At the adoption date, we applied FIN 48 to all tax positions for which the statute of limitations
remained open. Our adoption of FIN 48 on April 1, 2007 had no impact on our April 1, 2007 beginning
retained earnings balance. The amount of unrecognized tax benefits as of April 1, 2007 was $18.6 million.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at April 1, 2007 ..................................... $18,604
Additions based on tax positions related to the current year ........... 2,266
Additions for tax positions of prior years ......................... —
Reductions for tax positions of prior years ........................ (1,755)
Reductions as result of lapse of applicable statute of limitations ......... (229)
Settlements ............................................... (7,250)
Balance at March 31, 2008 .................................... $11,636
The total unrecognized tax benefit of $11.6 million is reflected in our consolidated balance sheet as
$1.5 million in net current deferred tax liabilities, $5.3 million in net long-term deferred tax assets, and
$4.8 million in other long-term liabilities. The amount of unrecognized tax benefits at March 31, 2008
includes $5.0 million of unrecognized tax benefits which, if ultimately recognized, will reduce our annual
effective tax rate.
We are subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions.
Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and
regulations and require significant judgment to apply. With few exceptions, we are no longer subject to
U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for fiscal years before
2004.
Our uncertain tax positions relate to tax years that remain subject to examination by the relevant tax
authorities. On May 24, 2007 we received notification from the IRS that the Joint Committee on Taxation
had completed its review of our file and took no exception to the conclusions reached by the IRS. We have
evaluated the impact of the conclusions reached in the IRS examination in the FIN 48 measurement and
recognition process. We are currently under routine examination by the IRS for our income tax returns for
fiscal years 2004 through 2007 and by various state jurisdictions for fiscal years subsequent to 2003. We do
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