Walmart 2006 Annual Report Download - page 42

Notes to Consolidated Financial Statements
WAL-MART
40
Items that give rise to signifi cant portions of the deferred tax
accounts are as follows (in millions):
January 31, 2006 2005
Deferred tax liabilities
Property and equipment $2,355 $2,210
International, principally asset
basis differences 1,141 1,054
Inventory 336 187
Other 265 230
Total deferred tax liabilities $4,097 $3,681
Deferred tax assets
International loss carryforwards and
asset basis differences $2,082 $1,460
Amounts accrued for fi nancial
reporting purposes not yet
deductible for tax purposes 1,668 1,361
Stock-based compensation expense 248 258
Other 353 263
Total deferred tax assets 4,351 3,342
Valuation allowance (1,054) (526)
Total deferred tax assets, net of
valuation allowance $3,297 $2,816
Net deferred tax liabilities $ 800 $ 865
The change in the Company’s net deferred tax liability is impacted
by foreign currency translation.
A reconciliation of the signifi cant differences between the effective
income tax rate and the federal statutory rate on pretax income is
as follows:
Fiscal Year Ended January 31, 2006 2005 2004
Statutory tax rate 35.00% 35.00% 35.00%
State income taxes, net of
federal income tax benefi t 1.86% 2.30% 1.53%
Income taxes outside the
United States (1.75%) (1.81%) (0.20%)
Other (1.68%) (0.79%) (0.27%)
Effective income tax rate 33.43% 34.70% 36.06%
Federal and state income taxes have not been provided on accumu-
lated but undistributed earnings of foreign subsidiaries aggregating
approximately $6.8 billion at January 31, 2006 and $5.3 billion
at January 31, 2005, as such earnings have been permanently
reinvested in the business. The determination of the amount of
the unrecognized deferred tax liability related to the undistributed
earnings is not practicable.
The Company had foreign net operating loss carryforwards of
$4.7 billion at January 31, 2006. Of this amount, $1.3 billion
related to the December 2005 consolidation of The Seiyu, Ltd.
The recording of the related deferred tax asset of $525 million
resulted in a corresponding increase in the valuation allowance.
Any tax benefi t ultimately realized from the Japan net operating
loss carryforward will adjust goodwill. Net operating loss carryfor-
wards of $1.4 billion expire in various years through 2011.
6 ACQUISITIONS AND DISPOSAL
Acquisitions
During December 2005, the Company purchased an additional
interest in The Seiyu, Ltd. (“Seiyu”), for approximately $570 million,
bringing the Company’s total investment in Seiyu, including adjust-
ments arising from the equity method of accounting, to $1.2 billion.
Seiyu is a retailer in Japan, which operates 398 stores selling apparel,
general merchandise, food and certain services. Following this
additional purchase, the Company owns approximately 53.3% of
Seiyu. Beginning on the date of the controlling interest purchase,
the Company began consolidating Seiyu as a majority-owned
subsidiary using a December 31 fi scal year-end. Seiyu’s results of
operations were not material to the Company. As a result of the
consolidation of Seiyu, total assets and liabilities of $6.8 billion and
$5.6 billion, respectively, were recorded in our fi nancial statements.
Goodwill recorded in the consolidation amounted to approximately
$1.6 billion. The amount of assets and liabilities recorded in
the consolidation of Seiyu are preliminary estimates made by
management and will be fi nalized upon completion of the valuation
of tangible and intangible assets and liabilities.
The minority interest in Seiyu is represented, in part, by shares of
Seiyu’s preferred stock which are convertible into shares of Seiyu
common stock. If the minority holder of Seiyu’s preferred stock pro-
poses to sell or convert its shares of preferred stock, the Company
has the right to purchase those shares at a predetermined price.
Through a warrant exercisable through December 2007, the
Company can contribute approximately ¥154.6 billion, or $1.3 bil-
lion at a January 31, 2006, exchange rate of 117.75 yen per dollar,
for approximately 538 million additional common shares of Seiyu
stock. If the warrant is exercised, we would own approximately 71%
of the stock of Seiyu by the end of December 2007. These calcula-
tions assume no conversion of Seiyu’s preferred stock into common
shares and no other issuances of Seiyu common shares.
In December 2005, the Company completed the purchase of Sonae
Distribuição Brasil S.A. (“Sonae”), a retail operation in Southern
Brazil consisting of 139 hypermarkets, supermarkets and warehouse
units. The purchase price was approximately $720 million. Assets
recorded in the acquisition of Sonae were $1.3 billion and liabilities
assumed were $566 million. As a result of the Sonae acquisition, we
recorded goodwill of $305 million and other identifi able intangible
assets of $89 million. Sonae’s results of operations, which were not
material to the Company, are included in our consolidated fi nancial
statements following the date of acquisition using a December 31
fi scal year-end. The amount of assets and liabilities recorded in the
purchase of Sonae are preliminary estimates made by management
and will be fi nalized upon completion of the valuation of tangible
and intangible assets and liabilities.