Apple 2004 Annual Report Download - page 44

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be indefinitely reinvested outside the U.S. As of September 25, 2004, the Company had deferred tax assets arising from deductible temporary
differences, tax losses, and tax credits of $647 million before being offset against certain deferred tax liabilities and a valuation allowance for
presentation on the Company's balance sheet. Management believes it is more likely than not that forecasted income, including income that may
be generated as a result of certain tax planning strategies, will be sufficient to fully recover the remaining net deferred tax assets. As of
September 25, 2004, a valuation allowance of $30 million was recorded against the deferred tax asset for the benefits of tax losses that may not
be realized. The valuation allowance relates principally to the operating loss carryforwards acquired from NeXT and other acquisitions, the
utilization of which is subject to certain limitations imposed by the Internal Revenue Code. The Company will continue to evaluate the
realizability of the deferred tax assets quarterly by assessing the need for and amount of the valuation allowance.
The Internal Revenue Service (IRS) has completed its field audit of the Company's federal income tax returns for all years prior to 2001 and
proposed certain adjustments. Certain of these adjustments are being contested through the IRS Appeals Office. Substantially all IRS audit issues
for these years have been resolved. In addition, the Company is also subject to audits by state, local, and foreign tax authorities. Management
believes that adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits
cannot be predicted with certainty. Should any issues addressed in the Company's tax audits be resolved in a manner not consistent with
management's expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs.
Cumulative Effects of Accounting Changes
Financial Instruments with Characteristics of Both Liabilities and Equity
On May 15, 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity . SFAS No. 150 requires issuers to classify as liabilities certain freestanding financial instruments
that embody obligations for the issuer and have characteristics of both liabilities and equity. The Company adopted the provisions of SFAS
No. 150 on June 29, 2003, which resulted in a favorable cumulative effect type adjustment of approximately $3 million. This adjustment
represented the mark-to-market adjustment to fair value for a forward purchase agreement that allowed the Company to acquire 1.5 million
shares of its common stock at a price of $16.64 per share. The Company settled this forward purchase agreement in August 2003. The settlement
resulted in an additional gain of approximately $6 million, which is included in interest and other income, net.
Accounting for Asset Retirement Obligations
On September 29, 2002, the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations , which addresses financial
accounting and reporting for obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. Net
of the related income tax effect of approximately $1 million, adoption of SFAS No. 143 resulted in an unfavorable cumulative-effect type
adjustment to net income during 2003 of approximately $2 million. This adjustment represents cumulative depreciation and accretion that would
have been recognized through the date of adoption of SFAS No. 143 had the statement been applied to the Company's existing asset retirement
obligations at the time they were initially incurred.
Recent Accounting Pronouncements
In December 2003, the Securities and Exchange Commission released Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition , which
supercedes SAB 101, Revenue Recognition in Financial Statements . SAB 104 clarifies existing guidance regarding revenue contracts that
contain multiple deliverables to make it consistent with Emerging Issues Task Force (EITF) No. 00-21. The adoption of SAB 104 did not have a
material impact on the Company's results of operations or financial position.
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