eTrade 2006 Annual Report Download - page 128

Deferred income taxes are recorded when revenues and expenses are recognized in different periods for
financial statement and tax return purposes. Prior year balances for the deferred tax asset and liabilities have been
re-presented to ensure consistency between periods. The adjustments relate to the presentation of the federal
benefit of the state deferred assets and liabilities. The temporary differences and tax carry-forwards that created
deferred tax assets and deferred tax liabilities are as follows (dollars in thousands):
December 31,
2006 2005
Deferred tax assets:
Reserves and allowances $ 29,690 $ 20,161
Net unrealized gain on equity investments and Bank assets
held-for-sale 94,129 109,454
Net operating loss carry-forwards 64,299 59,559
Deferred compensation 19,285 11,023
Capitalized technology development 1,887 3,152
Restructuring reserve and related write-downs 44,823 53,298
Total deferred tax assets 254,113 256,647
Deferred tax liabilities:
Internally developed software (23,330) (19,490)
Acquired intangibles (22,219) (21,363)
Basis differences in investments (113,306) (113,271)
Loan fees (4,488) (6,710)
Depreciation and amortization (89,801) (29,785)
Purchased software (3,024) (3,024)
Retained servicing rights (1,649) (2,644)
Other (16,486) (17,150)
Total deferred tax liabilities (274,303) (213,437)
Valuation allowance (38,295) (39,359)
Net deferred tax asset (liability) $ (58,485) $ 3,851
The Company maintains a valuation allowance of $38.3 million and $39.4 million at December 31, 2006
and 2005, respectively, against certain of its deferred tax assets, as it is more likely than not that they will not be
fully realized. The Company’s valuation allowance decreased by $1.1 million the year ended December 31, 2006.
The principal components of the deferred tax assets for which a valuation allowance has been established include
the following state and foreign country net operating loss carry-forwards and excess tax bases in certain illiquid
investments:
• At December 31, 2006, the Company had foreign country net operating loss carry-forwards of
approximately $94.0 million for which a deferred tax asset of approximately $29.3 million was
established. The foreign net operating losses represent the foreign tax loss carry-forwards in numerous
foreign countries, some of which are subject to expiration from in 2008. In most of these foreign
countries, the Company has historical tax losses, and the Company continues to project to incur operating
losses in most of these countries. Accordingly, the Company has provided a valuation allowance of
$20.0 million against such deferred tax asset at December 31, 2006.
• At December 31, 2006, the Company had gross state net operating loss carry-forwards of $148.0 million
that expire between 2008 and 2026, most of which are subject to reduction for apportionment when
utilized. A deferred tax asset of approximately $10.4 million has been established related to these state net
operating loss carry-forwards with a valuation allowance of $3.1 million against such deferred tax asset at
December 31, 2006.
• At December 31, 2006, the Company maintains a valuation allowance against the excess tax basis in
certain capital assets of approximately $11.0 million. The capital assets in question are certain
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