THQ 2012 Annual Report Download - page 76

68
March 31,
2012 2011
Deferred income tax assets:
Accruals, reserves and other ex
p
enses $ 29,570 $ 29,118
Tax credit carr
y
forwards 42,749 41,676
Net o
p
eratin
g
loss carr
y
forwards 215,016 182,002
De
p
reciation and amortization 1,708 7,469
Unrealized loss on investments 806 806
Othe
r
40,270 51,412
Total deferred income tax assets 330,119 312,483
Valuation allowance
(
277,032
)
(
193,312
)
Deferred tax asset, net of valuation allowance 53,087 119,171
Deferred income tax liabilities:
Software develo
p
ment costs
(
36,520
)
(
89,622
)
Unrealized
g
ain on investments
(
551
)
(
568
)
Unrepatriated foreign earnings
(
10,718
)
(
20,265
)
Total deferred income tax liabilities
(
47,789
)
(
110,455
)
Net deferred tax asset $ 5,298 $ 8,716
As of March 31, 2012, current net deferred tax assets were $5.7 million and long term net deferred tax liabilities were
$0.4 million. As of March 31, 2011, current net deferred tax assets were $8.2 million and long term net deferred tax assets were
$0.5 million.
As of March 31, 2012, we have federal and various state net operating loss carryforwards totaling $584.6 million and
$338.6 million, respectively, that expire through 2032 and foreign net operating loss carryforwards totaling $29.7 million, the
majority of which can be carried forward through 2026, 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 18 — Stockholders' Rights Plan").
The tax credit carryforwards as of March 31, 2012 include research and development tax credit carryforwards of $26.1 million
and $22.6 million for federal and state purposes, respectively. The federal tax credit carryforwards expire through 2032, 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 our deferred tax assets is dependent upon the existence of sufficient
taxable income generated in the carryforward periods. As a result, our U.S. net deferred tax assets are reduced by a valuation
allowance of $277.0 million and $193.3 million at March 31, 2012 and 2011, 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 2012 U.S. taxable loss. 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 foreign tax credits.
At March 31, 2012 we had accumulated foreign earnings of $28.5 million. We have fully provided for taxes for the anticipated
repatriation of earnings of our foreign subsidiaries.
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.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (amounts in thousands):