THQ 2010 Annual Report Download - page 82

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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 were as follows (in thousands):
March 31,
2010
2009
Deferred income tax assets:
Accruals, reserves and other expenses .......................... $35,281 $33,438
Tax credit carryforwards ..................................................... 36,194 31,090
Net operating loss carryforwards ...................................... 129,252 125,680
Depreciation and amortization .......................................... 7,760 9,565
Unrealized loss on investments ........................................ 1,557 3,445
Other..................................................................................... 23,166 27,910
Total deferred income tax assets ................................. 233,210 231,128
Valuation allowance ........................................................... (167,443) (164,225)
Deferred tax asset, net of valuation allowance .......... 65,767 66,903
Deferred income tax liabilities:
Software development costs............................................. (58,831) (58,809)
Unrealized gain on investments ....................................... (913) —
Total deferred income tax liabilities .............................. (59,744) (58,809)
Net deferred tax asset ........................................................... $6,023 $8,094
As of March 31, 2010, current net deferred tax assets were $5.6 million and long term net deferred tax
assets were $0.4 million. As of March 31, 2009, current net deferred tax assets were $6.1 million and long
term net deferred tax assets were $2.0 million.
As of March 31, 2010, we have federal and various state net operating loss carryforwards totaling
$353.8 million and $212.7 million, respectively, that expire through 2030 and foreign net operating loss
carryforwards totaling $26.7 million, the majority of which can be carried forward through 2030, provided that
we do not have an “ownership change,” as defined in Section 382 of the Internal Revenue Code, as
amended. In order to discourage such an “ownership change” and protect our net operating loss
carryforwards, on May 12, 2010, we entered into a Section 382 Rights Agreement (for further information see
“Note 20—Stockholders Rights Plan”).
The tax credit carryforwards as of March 31, 2010 include research and development tax credit carryforwards
of $24.5 million and $19.8 million for federal and state purposes, respectively. The federal tax credit
carryforwards expire through 2030, while the majority of the state credits are from California and can be
carried forward indefinitely.
We evaluate our deferred tax assets on a regular basis to determine if a valuation allowance against the net
deferred tax assets is required. A cumulative taxable loss in recent years is significant negative evidence in
considering whether deferred tax assets are realizable. We have had three years of cumulative U.S. tax
losses and can no longer rely on common tax planning strategies to use U.S. tax losses and we are
precluded from relying on projections of future taxable income to support the recognition of deferred tax
assets. As such, the ultimate realization of deferred tax assets is dependent upon the existence of sufficient
taxable income generated in the carryforward periods. As a result, our deferred tax assets are reduced by a
valuation allowance of $167.4 million and $164.2 million at March 31, 2010 and March 31, 2009,
respectively, as we believe that it is more likely than not that the deferred tax assets will not be fully realized.
The increase in the valuation allowance was primarily due to our fiscal 2010 U.S. tax loss, partially offset by
the recognition of a $3.6 million NOL carryback benefit claimed pursuant to a change in tax law. The deferred
tax assets for which a valuation allowance has been established include all domestic deferred tax assets,
such as federal and state net operating loss carryforwards and research and development credit
carryforwards, as well as certain foreign net operating loss carryforwards.
A portion of the tax benefits associated with certain net operating loss carryforwards relates to employee
stock options. Current year net operating losses have been reduced by $0.9 million for these items. A credit
will be recorded to additional paid-in capital when the net operating losses attributable to the employee stock
options can be utilized to reduce our income taxes payable.