Yahoo 2007 Annual Report Download - page 93

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of
deferred income tax assets and liabilities are as follows (in thousands):
2006 2007
December 31,
Deferred income tax assets:
Net operating loss and tax credit carryforwards ................... $276,098 $ 185,646
Stock-based compensation expense ............................ 150,552 311,955
Non-deductible reserves and expenses .......................... 162,846 110,894
Intangible assets .......................................... 72,705 54,103
Gross deferred income tax assets .............................. 662,201 662,598
Valuation allowance ....................................... (95,779) (66,488)
Deferred income tax assets ................................ $566,422 $ 596,110
Deferred income tax liabilities:
Unrealized investment gains ................................. $ (22,239) $ (14,136)
Purchased intangible assets .................................. (38,109) (79,806)
Investments in equity interests ................................ (127,212) (147,343)
Other .................................................. (28,789) —
Deferred income tax liabilities .............................. $(216,349) $(241,285)
Net deferred income tax assets ............................... $350,073 $ 354,825
As of December 31, 2007, the Company’s federal and state net operating loss carryforwards for income tax purposes
were approximately $808 million and $354 million, respectively. Approximately $347 million of the $808 million
federal net operating loss carryforwards resulted from exercises of employee stock options and are not recorded on
the Company’s consolidated balance sheet. In accordance with SFAS 123R, such unrecognized deferred tax
benefits will be accounted for as a credit to additional paid-in-capital if and when realized through a reduction in
income tax payable. If not utilized, the federal net operating loss carryforwards will begin to expire in 2019 and the
state net operating loss carryforwards will begin to expire in 2008. The Company’s federal and state research tax
credit carryforwards for income tax purposes are approximately $131 million and $129 million, respectively. If not
utilized, the federal research tax credit carryforwards will begin to expire in 2010. The state research tax credit
carryforwards will not expire.
During 2007, the Company determined that income tax benefits of $127 million ($92 million related to 2006 and the
remainder related to earlier years) should not have been recorded to additional paid-in capital as tax benefits from
stock-based awards because for financial statement ordering purposes, the tax benefits should have been attributed
to the utilization of acquired net operating losses first or should not have been recognized at all because the
underlying tax amounts should not have been offset by tax benefits from stock-based awards. As a result, in 2007
the Company decreased additional paid-in capital by $127 million, decreased deferred tax assets by $72 million,
decreased goodwill by $18 million, increased certain taxes payable by $22 million, reduced income tax expense by
$9 million, and increased earnings in equity interests by $6 million (as a result of the favorable effect of foreign tax
credits related to dividends received in 2006 and 2007). In the 2007 statement of cash flows, the Company reduced
by $92 million, excess tax benefits from stock-based awards recorded in cash flows from operating activities with an
equivalent reduction to the amount of excess tax benefits recorded in cash flows from financing activities. This
reclassification had no impact on overall cash flows. The amounts that impacted income tax expense and earnings
in equity interests also increased diluted earnings per share by $0.01 for the year ended December 31, 2007. The
Company believes that the aforementioned amounts are not material to reported amounts for 2007, 2006, or earlier
years and therefore has corrected them in the 2007 consolidated financial statements.
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Yahoo! Inc.
Notes to Consolidated Financial Statements — (Continued)