Income Taxes Contingencies Our effective tax rate is based on the mix of income and losses in  our U.S. and non-U.S. operations, statutory tax rates, and tax- planning opportunities available to us in the various jurisdictions  in which we operate. Significant judgment is required to evaluate  our tax positions. Tax law requires us to include items in our tax return at different  times from when these items are reflected in our Consolidated  Statements of Income. As a result, the effective tax rate reflected  in our Consolidated Financial Statements is different from the tax  rate reported on our tax return (our cash tax rate). Some of these  differences, such as expenses that are not deductible in our tax  return, are permanent. Other differences, such as depreciation  expense, reverse over time. These timing differences create deferred  tax assets and liabilities. We determine our deferred tax assets and  liabilities based on temporary differences between the financial  reporting and the tax basis of assets and liabilities. The excess tax  benefits associated with stock-option exercises and vesting of  restricted stock units also create a difference between our cash tax  rate and the effective tax rate in our Consolidated Income Statement. As of December 31, 2010, we had gross deferred tax assets of $37.6  million and gross deferred tax liabilities of $43.3 million. The  deferred tax assets include $13.0 million of deferred tax assets  related to $49.0 million of net operating losses (NOLs) of our non- U.S. operations. Because of the historical operating losses of certain  of the non-U.S. operations that generated these NOLs, we have  recorded a valuation allowance against all but approximately $5.6  million of the NOLs, reflecting the likelihood that the benefit of the  NOLs will not be realized. In assessing the realizability of our  deferred tax assets, we consider whether it is more likely than not  that some portion or all of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, we consider both  positive and negative evidence, including tax-planning strategies,  projected future taxable income, and recent financial performance.  If we determine a lesser allowance is required at some point in the  future, we would record a reduction to our tax expense and valua- tion allowance. These adjustments would be made in the same  period we determined the change in the valuation allowance was  needed. This would cause our income tax expense, effective tax  rate, and net income to fluctuate. We are subject to various claims and contingencies related to legal  proceedings and investigations, which we describe in Note 16 of  the Notes to our Consolidated Financial Statements. These legal  proceedings involve inherent uncertainties including, but not limited  to, court rulings, negotiations between affected parties, and govern- ment actions. Assessing the probability of loss for such contingen- cies and determining how to accrue the appropriate liabilities  requires judgment. If actual results differ from our assessments, our  financial position, results of operations, or cash flows would be impacted. Assessing the future tax consequences of events that have been  recognized in our Consolidated Financial Statements or tax returns  requires judgment. Variations in the actual outcome of these future  tax consequences could materially impact our financial position,  results of operations, or cash flows. We use judgment to classify unrecognized tax benefits as either  current or noncurrent liabilities in our Consolidated Balance Sheets.  Settlement of any particular issue would usually require the use of  cash. We generally classify liabilities associated with unrecognized  tax benefits as noncurrent liabilities. It typically takes several years  between our initial tax return filing and the final resolution of any  uncertain tax positions with the tax authority. We recognize favor- able resolutions of tax matters for which we have previously estab- lished reserves as a reduction to our income tax expense when the  amounts involved become known. We assess uncertain tax positions in accordance with FASB ASC  740,  Income Taxes . We use judgment to identify, recognize, and  measure the amounts to be recorded in the financial statements  related to tax positions taken or expected to be taken in a tax return.  We recognize liabilities to represent our potential future obligations  to taxing authorities for the benefits taken in our tax returns. We  adjust these liabilities, including any impact of the related interest  and penalties, in light of changing facts and circumstances such as  the progress of a tax audit. A number of years may elapse before  a particular matter for which we have established a reserve is  audited and finally resolved. The number of years with open tax  audits varies depending on the tax jurisdiction. Morningstar, Inc. 2010 Annual Report 95