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Income Taxes | 12 Months Ended
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Oct. 31, 2016
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The domestic and foreign components of the Company’s total income (loss) before provision for income taxes are as follows:
| Year Ended October 31,
| 2016 |  | 2015 |  | 2014
| (in thousands)
United States | $ | 22,134 |  |  | $ | 42,571 |  |  | $ | (7,638 | )
Foreign | 307,414 |  |  | 239,039 |  |  | 279,780 |
Total income (loss) before provision for income taxes | $ | 329,548 |  |  | $ | 281,610 |  |  | $ | 272,142 |
The components of the (benefit) provision for income taxes were as follows:
| Year Ended October 31,
| 2016 |  | 2015 |  | 2014
| (in thousands)
Current: |  |  |  |  |
Federal | $ | (6,106 | ) |  | $ | (21,911 | ) |  | $ | (14,951 | )
State | 2,670 |  |  | 1,385 |  |  | 279 |
Foreign | 80,195 |  |  | 39,319 |  |  | 42,085 |
| 76,759 |  |  | 18,793 |  |  | 27,413 |
Deferred: |  |  |  |  |
Federal | (23,510 | ) |  | 44,462 |  |  | (4,612 | )
State | 11,950 |  |  | (2,282 | ) |  | (4,141 | )
Foreign | (2,477 | ) |  | (5,297 | ) |  | (5,642 | )
| (14,037 | ) |  | 36,883 |  |  | (14,395 | )
Provision (benefit) for income taxes | $ | 62,722 |  |  | $ | 55,676 |  |  | $ | 13,018 |
The provision (benefit) for income taxes differs from the taxes computed with the statutory federal income tax rate as follows:
| Year Ended October 31,
| 2016 |  | 2015 |  | 2014
| (in thousands)
Statutory federal tax | $ | 115,343 |  |  | $ | 98,564 |  |  | $ | 95,251 |
State tax (benefit), net of federal effect (1) | 11,015 |  |  | (4,764 | ) |  | (4,306 | )
Tax credits (2) | (36,979 | ) |  | (13,301 | ) |  | (5,153 | )
Tax on foreign earnings less than U.S. statutory tax | (68,246 | ) |  | (56,536 | ) |  | (61,376 | )
Tax settlements | (16,479 | ) |  | (6,251 | ) |  | (19,645 | )
Stock based compensation | 5,709 |  |  | 5,406 |  |  | 5,675 |
Changes in valuation allowance | 428 |  |  | (216 | ) |  | (235 | )
Federal statute lapses | — |  |  | (2,265 | ) |  | (6,746 | )
Integration of acquired technologies | 37,525 |  |  | 33,015 |  |  | 4,715 |
Undistributed earnings of foreign subsidiaries | 9,595 |  |  | — |  |  | — |
Other | 4,811 |  |  | 2,024 |  |  | 4,838 |
Provision (benefit) for income taxes | $ | 62,722 |  |  | $ | 55,676 |  |  | $ | 13,018 |
(1) | State tax (benefit), net of federal effect, includes changes in valuation allowance of $25.1 million, $2.4 million and $1.9 million for fiscal years 2016, 2015 and 2014, respectively.
(2) | Tax credits include benefits from the retroactive reinstatement of the U.S. federal research tax credit.
The U.S. federal research tax credit expired on December 31, 2013, resulting in only two months of credit for fiscal 2014. The credit was reinstated in fiscal 2015, resulting in a tax benefit of approximately $12.4 million in the above amount for the period January 1 through December 31, 2014. The credit was permanently reinstated in fiscal 2016, resulting in a tax benefit of approximately $37.1 million in the above amount for the period January 1, 2015 through October 31, 2016. The integration of acquired technologies represents the income tax effect resulting from the transfer of certain intangible assets among company-controlled entities. The income tax effect is generally recognized over five years. These intangible assets generally result from the acquisition of technology by a company-controlled entity as part of a business or asset acquisition. The tax impact of the integration of acquired technologies in fiscal 2016 was $37.5 million compared to $33.0 million in fiscal 2015 and $4.7 million in fiscal 2014. The tax impact in fiscal 2016 and fiscal 2015 was higher compared to fiscal 2014 due to the higher value of the intangible assets that were transferred to certain wholly owned foreign subsidiaries in November 2014. The significant components of deferred tax assets and liabilities were as follows:
| October 31,
| 2016 |  | 2015
| (in thousands)
Net deferred tax assets: |  |  |
Deferred tax assets: |  |  |
Accruals and reserves | $ | 34,324 |  |  | $ | 40,373 |
Deferred revenue | 42,497 |  |  | 36,460 |
Deferred compensation | 64,321 |  |  | 69,716 |
Capitalized costs | 54,123 |  |  | 60,998 |
Capitalized research and development costs | 18,896 |  |  | 24,748 |
Stock compensation | 22,298 |  |  | 18,001 |
Tax loss carryovers | 31,748 |  |  | 50,987 |
Foreign tax credit carryovers | 10,369 |  |  | 1,064 |
Research and other tax credit carryovers | 136,690 |  |  | 80,327 |
Other | 5,161 |  |  | 5,340 |
Gross deferred tax assets | 420,427 |  |  | 388,014 |
Valuation allowance | (73,909 | ) |  | (48,700 | )
Total deferred tax assets | 346,518 |  |  | 339,314 |
Deferred tax liabilities: |  |  |
Intangible assets | 54,604 |  |  | 66,345 |
Undistributed earnings of foreign subsidiaries | 10,888 |  |  | 933 |
Total deferred tax liabilities | 65,492 |  |  | 67,278 |
Net deferred tax assets | $ | 281,026 |  |  | $ | 272,036 |
It is more likely than not that the results of future operations will be able to generate sufficient taxable income to realize the net deferred tax assets. The valuation allowance provided against our deferred tax assets as of October 31, 2016 is mainly attributable to California research credit and international foreign tax credit carryforwards. The valuation allowance increased by a net of $25.2 million in fiscal 2016 primarily due to a change in the expected realizability of deferred tax assets related to California research credit carryforwards resulting in part from the impact of audit adjustments agreed to during fiscal 2016. The Company has the following tax loss and credit carryforwards available to offset future income tax liabilities:
Carryforward | Amount |  | Expiration Date
| (in thousands) |  |
Federal net operating loss carryforward | $ | 73,226 |  |  | 2018-2034
Federal research credit carryforward | 172,959 |  |  | 2019-2036
Federal foreign tax credit carryforward | 2,946 |  |  | 2019-2022
International foreign tax credit carryforward | 9,445 |  |  | Indefinite
California research credit carryforward | 160,442 |  |  | Indefinite
Other state research credit carryforward | 7,145 |  |  | 2017-2031
State net operating loss carryforward | 36,735 |  |  | 2017-2036
The federal and state net operating loss carryforward is from acquired companies and the annual use of such loss is subject to significant limitations under Internal Revenue Code Section 382. Foreign tax credits may only be used to offset tax attributable to foreign source income. The federal research tax credit was permanently reinstated in fiscal 2016. The Company has unrecognized deferred tax assets of approximately $106.5 million as of October 31, 2016 attributable to excess tax deductions related to stock options, the benefit of which will be credited to stockholders' equity upon adoption of Accounting Standards Update (ASU) 2016-09, "Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting", in the first quarter of fiscal 2017. See Note 14. Effect of New Accounting Pronouncements for further discussion. The Company has provided for the U.S. income tax liability on foreign earnings, except for foreign earnings that are considered indefinitely reinvested outside of the U.S. If the cumulative foreign earnings exceed the amount the Company intends to reinvest in foreign country operations in the future, the Company would provide for taxes on such excess amount. As of October 31, 2016, there were approximately $1,143.2 million of earnings upon which U.S. income taxes of approximately $248.0 million have not been provided for. The gross unrecognized tax benefits decreased by approximately $25.5 million during fiscal 2016 resulting in gross unrecognized tax benefits of $106.5 million as of October 31, 2016. A reconciliation of the beginning and ending balance of gross unrecognized tax benefits is summarized as follows:
| As of October 31, 2016 |  | As of October 31, 2015
| (in thousands)
Beginning balance | $ | 132,054 |  |  | $ | 124,102 |
Increases in unrecognized tax benefits related to prior year tax positions | 7,205 |  |  | 10,922 |
Decreases in unrecognized tax benefits related to prior year tax positions | (43,944 | ) |  | (7,526 | )
Increases in unrecognized tax benefits related to current year tax positions | 13,880 |  |  | 13,232 |
Decreases in unrecognized tax benefits related to settlements with taxing authorities | (333 | ) |  | — |
Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations | (2,659 | ) |  | (5,996 | )
Increases in unrecognized tax benefits acquired | 49 |  |  | 976 |
Changes in unrecognized tax benefits due to foreign currency translation | 290 |  |  | (3,656 | )
Ending balance | $ | 106,542 |  |  | $ | 132,054 |
As of October 31, 2016 and 2015, approximately $106.5 million and $129.4 million, respectively, of the unrecognized tax benefits would affect our effective tax rate if recognized upon resolution of the uncertain tax positions. Interest and penalties related to estimated obligations for tax positions taken in the Company’s tax returns are recognized as a component of income tax expense (benefit) in the consolidated statements of operations and totaled approximately $0.8 million, $0.6 million and $0.5 million for fiscal years 2016, 2015 and 2014, respectively. As of October 31, 2016 and 2015, the combined amount of accrued interest and penalties related to tax positions taken on the Company’s tax returns was approximately $3.1 million and $2.2 million, respectively. The timing of the resolution of income tax examinations is highly uncertain as well as the amounts and timing of various tax payments that are part of the settlement process. This could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. The Company believes that in the coming 12 months, it is reasonably possible that either certain audits will conclude or the statute of limitations on certain state and foreign income and withholding taxes will expire, or both. Given the uncertainty as to ultimate settlement terms, the timing of payment and the impact of such settlements on other uncertain tax positions, the range of the estimated potential decrease in underlying unrecognized tax benefits is between $0 and $6 million. The Company and/or its subsidiaries remain subject to tax examination in the following jurisdictions:
Jurisdiction | Year(s) Subject to Examination
United States | Fiscal 2016
California | Fiscal years after 2011
Hungary and Ireland | Fiscal years after 2009
Japan and Taiwan | Fiscal years after 2010
In addition, the Company has made acquisitions with operations in several of its significant jurisdictions which may have years subject to examination different from the years indicated in the above table. On July 27, 2015, the Tax Court issued an opinion (Altera Corp. et al. v. Commissioner) regarding the treatment of stock-based compensation expense in intercompany cost-sharing arrangements. The U.S. Treasury has not withdrawn the requirement to include stock-based compensation from its regulations and the IRS has initiated an appeal of the Tax Court's opinion. As the final resolution with respect to historical cost-sharing of stock-based compensation, and the potential favorable benefits to the Company, is unclear, the Company is recording no impact at this time and will continue to monitor developments related to this opinion and the potential impact of those developments on the Company's prior fiscal years. Effective February 1, 2016, the Company amended its cost- sharing arrangement to exclude stock-based compensation expense on a prospective basis and has reflected the corresponding benefits in its effective annual tax rate. In fiscal 2016, the Company early adopted ASU 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes", on a retrospective basis. As required by ASU 2015-17, all deferred tax assets and liabilities are classified as non-current in the Company's consolidated balance sheet, which is a change from the Company's prior period presentations whereby certain of its deferred tax assets were classified as current and the remainder were classified as non-current. Upon adoption of ASU 2015-17, current deferred tax assets of $95.0 million in the Company's October 31, 2015 consolidated balance sheet were reclassified as non-current. IRS Examinations In fiscal 2016, the Company reached final settlement with the Examination Division of the IRS for fiscal 2015 and recognized approximately $20.7 million in unrecognized tax benefits. In fiscal 2015, the Company reached final settlement with the IRS on the integration of acquired technologies for fiscal 2015 and research tax credit for fiscal 2014 that resulted in $7.0 million and $3.2 million in tax benefits, respectively. In fiscal 2014, the Company reached final settlement with the IRS on the remaining fiscal 2012 issues and recognized approximately $10.0 million in unrecognized tax benefits. The Company also reached final settlement with the IRS for its audit of fiscal 2013 and recognized approximately $5.5 million in unrecognized tax benefits. State Examinations In fiscal 2016, the Company reached final settlement with the California Franchise Tax Board for fiscal 2011, 2010, and 2009. As a result of the settlement, the Company reduced its deferred tax assets by $4.9 million, recognized $10.3 million in unrecognized tax benefits, and increased its valuation allowance by $5.4 million. Non-U.S. Examination Hungary In October 2016, the Hungarian Tax Authority (HTA) completed an audit of the Company's Hungary subsidiary (Synopsys Hungary) for fiscal years 2011 through 2013. The HTA has challenged certain of Synopsys Hungary's tax positions taken during these years, including the deduction of certain research expenses and for withholding taxes on payments made to affiliates, resulting in a proposed aggregate tax assessment of $47 million. If the assessment is ultimately upheld, Synopsys Hungary could also be liable for penalties of up to 50 percent of the tax, as well as interest. While the ultimate outcome is not certain, the Company believes there is no merit to these assessments and intends to contest them. While the appeal could take several years, we believe that we will ultimately prevail against the positions taken by the HTA. Taiwan In fiscal 2016, the Company reached final settlement with the Taiwan tax authorities for fiscal 2011, with regard to certain transfer pricing issues. As a result of the settlement, the Company paid $0.3 million of tax and recognized $0.7 million in unrecognized tax benefits. In fiscal 2015, the Company reached final settlement with the Taiwan tax authorities for fiscal 2012 with regard to certain transfer pricing issues. As a result of the settlement, the Company recognized approximately $1.1 million in unrecognized tax benefits. The Company also reached final settlement with the Taiwan tax authorities for fiscal 2013 with regard to certain transfer pricing issues. As a result of the settlement and the application of the settlement to fiscal 2014, the Company's unrecognized tax benefits decreased by $1.2 million and $1.2 million for fiscal years 2013 and 2014, respectively. In fiscal 2014, the Company reached settlements with the Taiwan tax authorities for fiscal years 2010 and 2009, with regard to certain transfer pricing issues. As a result of the settlements and the application of the settlement to other open fiscal years, the Company’s unrecognized tax benefits decreased by $5.1 million. The net tax benefit resulting from the settlements and the application to other open fiscal years was $3.9 million. India In fiscal 2016, the Company agreed to settle certain transfer pricing issues with the Indian tax authorities for various fiscal years. As a result of the settlement, the Company recognized income tax expense, net of foreign tax credits, of $4.6 million.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32559-109319 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32718-109319 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32537-109319 + Details
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