Zen, perhaps there was something about the nature of the tax benefits that required EZEN to take them last year. The Isreali tax settlement could have even been included as "other income" but they chose to declare it as a tax benefit. I'm sure that their valuation allowance cancelled out any tax that would have been shown on the income statement, and had nothing to do with the Isreal situation.
Just to refresh everyone's memory, the reason that no taxes are declared on the income statement is the use of something called "the valuation allowance." For EZEN, they had a tremendous amount of losses in their early years and thus built up a huge amount of NOLs:
"Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Management continues to monitor the likelihood of recovering of its deferred tax assets in light of its continued generation of profits. If the Company continues to generate profits during 2005, and there is continued confidence in the outlook for continuing future profitability, management may deem that it is more likely than not that certain of the deferred tax assets will be realized, resulting in a potentially material income tax benefit adjustment from the release of some or all of the Company’s approximately $33 million valuation allowance.
-EZEN's Q3 10Q
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Every year that EZEN is solidly profitable increases the chance that some or all of the valuation allowance will be recognized as "income" and then placed on the balance sheet as a deferred tax asset. At that point, EZEN will start "paying" income taxes on its income statement although it will be paying no taxes on a cash basis. The tax asset will be reduced, and shareholder's equity increased to offset.
Given EZEN's recent run of profitability, a more conservative accounting team would have forced the company to recognize a good chunk of this valuation allowance by now. Is there any doubt that EZEN will again be profitable this year (and probably next)?
Because I have no way to know when the accountants will decide to "do the right thing", I always factor in some kind of tax rate depending upon statutory rates in whichever country the corporation is doing business. US corps I usually charge a 35% rate.
AI
