On the Surface

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Income Taxes. Our income tax expense includes United States federal, state, and local, and foreign income taxes, and is based on
reported pre-tax income. We defer income taxes for all temporary differences between pre-tax financial and taxable income and between
the book and tax basis of assets and liabilities. We record valuation allowances to reduce net deferred tax assets to an amount that we
expect will more-likely-than-not be realized. In making such determination, we consider all available information, including scheduled
reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial operations. In the event we
were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount,
we would make an adjustment to the valuation allowance which would reduce the provision for income taxes and the effective tax rate.
In July 2006, the FASB issued Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes—an
Interpretation of FASB Statement No. 109,” (“SFAS No. 109”). This interpretation provides guidance for the accounting for uncertainty in
income taxes recognized in our financial statements in accordance with SFAS No. 109. FIN No. 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure,
and transition. The evaluation of a tax position in accordance with FIN No. 48 is a two-step process. The first step is recognition: The
determination of whether or not it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the morelikely-than-not
recognition threshold, we presume that the position will be examined by the appropriate tax authority and that the tax
authority will have full knowledge of all relevant information. The second step is measurement: A tax position that meets the more-likelythan-not
threshold is measured to determine the amount of benefit to recognize in the financial statements. The measurement process
requires the determination of the range of possible settlement amounts and the probability of achieving each of the possible settlements.
The tax position is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate
settlement. No tax benefits are recognized for positions that do not meet the more-likely-than-not threshold. Tax positions that previously
failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting period in which that
threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be
derecognized in the first subsequent financial reporting period in which the threshold is no longer met. In addition, FIN No. 48 requires the
cumulative effect of adoption to be recorded as an adjustment to the opening balance of retained earnings. FIN No. 48 is effective for fiscal
years beginning after December 15, 2006. We adopted FIN No. 48 effective April 1, 2007, as required.
We describe income taxes and the impact of adopting FIN No. 48 further in Note 9 to our consolidated financial statements
titled, “Income Taxes.”
Share-Based Compensation. We summarize share-based compensation in Note 15. On April 1, 2006, we adopted the provisions of
Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS No. 123R”), “Share-Based Payment,” and elected to use the
modified prospective transition method. As a result, we began recognizing compensation expense for share-based compensation in fiscal 2007.
Recently Issued Accounting Standards Impacting the Company. In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (revised 2007) (“SFAS No. 141R”), “Business Combinations.” SFAS No. 141R retains the purchase method
of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in
purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the
capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS
No. 141R will impact financial statements on the acquisition date and in subsequent periods, as well as prior to the acquisition date because
of the accounting treatment for acquisition-related costs. The provisions of SFAS No. 141R are to be applied prospectively to business
combinations completed in fiscal years beginning after December 15, 2008.
70