CHEN CLASS NOTES: DEFERRED TAXES
CLASS NOTES: DEFERRED TAXES
PART I: BOOK REPORTING OF INCOME TAXES
BOOK TAX DIFFERENCES: PERMANENT VS TEMPORARY
DEFERRED TAX ASSETS/DEFERRED TAX LIABILITIES
NET OPERATING LOSS CARRYFORWARD
PART II: REAL WORLD EXAMPLE TO ILLUSTRATE TAX FOOTNOTE
1
CHEN CLASS NOTES: DEFERRED TAXES
PART I: BOOK REPORTING OF INCOME TAXES
Fundamentals of Accounting for Income Taxes
Financial Statements
vs.
Tax Returns
(GAAP, accrual basis)
vs.
(IRS tax code,
modified cash
flow)
Investors/Creditors
vs.
Uncle Sam
≠
Taxable
Income
Book-tax
difference
Income Tax
Payble
Deferred
taxes
Pretax
Financial Income
Income Tax
Expense
≠
Two kinds of book-tax differences:
Pretax Financial Income (income reported on 10-Ks)
Adjusted for: Permanent Differences
Adjusted for: Temporary Differences
= Taxable Income (income reported on tax returns)
QUESTION: Why allow two sets of books? Different objectives of financial reporting and taxation!
GAAP
IRS TAX CODE
For whom?
For whom?
For what?
For what?
*provide data reflective of current
performance + predictive of future
performance
*public policy
*promote capital investment (by giving certain
tax breaks)
*assess cost of doing business
Why not let the tax code determine GAAP? We will almost surely lost the ability of financial
statements to accurately reflect current performance and to be predictive of future performance!
2
CHEN CLASS NOTES: DEFERRED TAXES
Permanent differences -- transactions are included in computing either pre-tax
accounting income or taxable income, but not both. They are items that (1) enter into
pretax financial income but never into taxable income, or (2) enter into taxable income but
never into pretax financial income.
Permanent differences affect Effective Tax Rate (I.T.E. / PRETAX INCOME).
• Tax-free interest income on investments in municipal bonds(state and local
governments pay interest that is usually not taxable).
• Premiums paid for life insurance carried by the company on key executives (company
is beneficiary) (not tax deductible)
• Fines and expenses resulting from a violation of law (recognized for GAAP purposes
but not for tax purposes).
• Corporate dividend exclusion (when a corporation gets a dividend from an investment
in common or preferred shares, a portion of the dividends received is excluded from
taxable income) (dividend income recognized for GAAP purposes but not for tax
purposes).
Permanent differences do NOT lead to deferred taxes.
3
CHEN CLASS NOTES: DEFERRED TAXES
Temporary differences -- the difference between the tax basis of an asset or liability and
its reported amount in the financial statements that will result in taxable or deductible
amounts in future years [when the reported amount of the asset or liability is recovered or
settled, respectively].
Temporary differences – occur when revenues or expenses are included in GAAP
income and taxable income in different periods. Thus also called timing differences.
Temporary differences – usually originate in one period (or periods) and then turn
around in another period (or periods).
¨Accelerated depreciation (for taxes, companies can now fully depreciate the assets in the
year of purcahse; for GAAP, companies often use straight-line).
¨Installment sales (for taxes, taxable income when the cash is received; for GAAP,
companies recognize income when sale is made).
Dr. cash
XXX
Dr. Accounts receivable XXX
ß BK>TAX à DTLiab.
Cr. Revenue from installment sales
XXX
¨Warranty expense (for taxes, deductible as expense in the period paid; for GAAP, an
expense in the period in which the sale is made).
Dr. Warranty expense
XXX
Cr. Liability (warranty)
XXX
4
ß BK<TAX à DTAsset.
CHEN CLASS NOTES: DEFERRED TAXES
Examples of Temporary Differences
Revenues or gains show up in the GAAP income statement before they show up on the tax
return. [Leads to Deferred Tax Liability; Book Income > Taxable Income]
1. Installment sale accounted for on the accrual basis for financial reporting purposes and on the
installment (cash) basis for tax purposes.
2. Contracts accounted for under the percentage-of-completion method for financial reporting
purposes and a portion of related gross profit deferred for tax purposes.
Expenses or losses show up on the GAAP income statement before they show up as a
deduction on the tax return. [Leads to Deferred Tax Asset; Book Income < Taxable
Income]
1. Product warranty liabilities.
2. Estimated liabilities related to discontinued operations or restructurings.
Revenues or gains show up in the tax return before they show up on the GAAP income
statement. [Leads to Deferred Tax Asset; Book Income < Taxable Income]
1. Subscriptions/rental payment received in advance.
2. Prepaid contracts and royalties received in advance.
Expenses or losses show up as a deduction on the tax return before they show up on the
GAAP income statement. [Leads to Deferred Tax Liability; Book Income > Taxable Income]
1. Depreciable property, depletable resources, and intangibles.
2. Deductible pension funding exceeding expense.
What is a deferred tax liability? It is the deferred tax consequences attributable to
taxable temporary differences. In other words, a deferred tax liability represents the
increase in taxes payable in future years as a result of taxable temporary differences
existing at the end of the current year.
What is a deferred tax asset? It is the deferred tax consequences attributable to deductible
temporary differences. In other words, a deferred tax asset represents the increase in taxes
refundable (or saved) in future years as a result of deductible temporary differences existing
at the end of the current year.
QUESTION: Are all deferred tax assets “good” and all deferred tax liabilities “bad” ??
5
CHEN CLASS NOTES: DEFERRED TAXES
EXAMPLE 1: Revenues/gains are taxable after they are recognized in GAAP income. Enacted
(i.e., statutory) tax rates are 40%, 20%, and 20% for Year 1, Year 2, and Year 3, respectively.
--------------------------------------------------------------------------------------------------------------------------------Income Statement
Year 1
Year 2
Year 3
Book
$100 (cash)
$100
$100
income
30 (A/R)
--$130
$100
$100
Taxable
income
Balance Sheet
$100
-$100
$100
-$100
$100
30
$130
Year 1
Year 2
Year 3
$30
$30
$0
GAAP
Accounts Receivable
Income tax payable = taxable income * current tax rate
Deferred tax liability/asset = timing difference * future tax rate. ß Why future instead
of current rate?
Income Tax Expense*
Income Tax Expense
46
Deferred Tax Liability
6
Income Tax Payable
40
20
Income Tax Payable
20
Income Tax Expense
20
Deferred Tax Liability
6
Income Tax Payable
26
*Here’s a good example of why you must PLUG income tax expense ... GAAP income $130 * (either .20 or .40) doesn’t give you the $46 we have for income tax
expense.
Year 1 GAAP
Balance Sheet:
Assets
Current:
Liabilities
Current:
Inc. Tax Payable
40
Long-Term:
Long-Term:
Accts. Receivable 30
Deferred Tax Liability 6
Year 1 GAAP Income Statement:
Income from cont. op’s 130
Income Tax Expense:
Current
(40)
Deferred
( 6)
Total
(46)
Net Income
84
ETR?
46/130 = 35.4%
Year 2 GAAP
Balance Sheet:
Assets
Current:
Liabilities
Current:
Accts. Rec.
Inc. Tax Payable
30
Long-Term:
Year 3 GAAP
Balance Sheet:
Assets
Current:
20
Long-Term:
Deferred Tax Liab.
Year 2 GAAP Income Statement:
Income from cont. op’s 100
Income Tax Expense:
Current
(20)
Deferred
( )
Total
(20)
Net Income
80
20/100 = 20%
6
Liabilities
Current:
Inc. Tax Payable
Long-Term:
Long-Term:
6
Year 3 GAAP Income Statement:
Income from cont. op’s 100
Income Tax Expense:
Current
(26)
Deferred
6
Total
(20)
Net Income
80
20/100 = 20%
26
CHEN CLASS NOTES: DEFERRED TAXES
Let’s change the assumption of EXAMPLE 1, and assume that $20 of the Accounts
Receivable is collected in Year 2, and the remaining $10 is collected in Year 3. Everything
else stays the same as in EXAMPLE 1.
EXAMPLE 1a: Revenues/gains are taxable after they are recognized in GAAP income. Enacted
tax rates are 40%, 20%, and 20% for Year 1, Year 2, and Year 3, respectively.
--------------------------------------------------------------------------------------------------------------------------------Income Statement
Year 1
Year 2
Year 3
Book
$100 (cash)
$100
$100
income
30 (A/R)
--$130
$100
$100
Taxable
income
Income Tax Expense
$100
-$100
46
$100
20
$120
[always plug]
Deferred Tax Liability
6
Income Tax Payable
40
Income Tax Expense
20
Deferrred Tax Liability
4
Income Tax Payable
$100
10
$110
[always plug]
Income Tax Expense 20
[always plug]
Deferred Tax Liability 2
24
Income Tax Payable
22
Assume the same collection pattern as in EX1a, now change the assumption of tax rates as
follows:
EXAMPLE 1b: Revenues/gains are taxable after they are recognized in GAAP income. Enacted
tax rates are 40%, 30%, and 20% for Year 1, Year 2, and Year 3, respectively.
--------------------------------------------------------------------------------------------------------------------------------Income Statement
Year 1
Year 2
Year 3
Book
$100 (cash)
$100
$100
income
30 (A/R)
--$130
$100
$100
Taxable
income
Income Tax Expense
$100
-$100
$100
20
$120
[always plug]
Deferred Tax Liability
Income Tax Payable
Income Tax Expense
[always plug]
Deferrred Tax Liability
40
$100
10
$110
Income Tax Expense
Deferred Tax Liability
Income Tax Payable
7
Income Tax Payable
[always plug]
CHEN CLASS NOTES: DEFERRED TAXES
EXAMPLE 2: Permanent difference. Tax free municipal bond income of $30 in year 1. 20%
tax rate all three years.
Year 1
$100
30
$130
Income Statement
book
income
Taxable
income
20 plug
20
Income Tax Expense
Income Tax Payable
Year 2 GAAP
Balance Sheet:
Assets
Current:
Liabilities
Current:
Income Tax
Payable
20
Long-Term:
Long-Term::
Year 1 GAAP Income Statement:
Income before taxes:
Income Tax Expense:
Current
Deferred
Total
Net Income
Year 3
$100
-$100
NOTE: Will never reverse so no deferred taxes on permanent differences!!
$100
$100
--$100
$100
$100
-$100
Income Tax Expense
Income Tax Payable
Year 1 GAAP
Balance Sheet:
Assets
Current:
Year 2
$100
-$100
(20)
-(20)
110
Income Tax Expense
Income Tax Payable
Year 3 GAAP
Balance Sheet:
Assets
Current:
Liabilities
Current:
Income Tax
Payable
20
Long-Term:
130
20 plug
20
Long-Term:
Year 2 GAAP Income Statement:
Income before taxes:
Income Tax Expense:
Current
Deferred
Total
Net Income
(20)
-(20)
80
Liabilities
Current:
Income Tax
Payable
20
Long-Term:
100
20 plug
20
Long-Term:
Year 3 GAAP Income Statement:
Income before taxes:
Income Tax Expense:
Current
Deferred
Total
Net Income
100
(20)
-(20)
80
*Here’s the most common reason why you must PLUG income tax expense ... GAAP income $130 * 20% doesn’t give
you the $20 we have for income tax expense for year 1. Permanent differences cause pre-tax gaap income times the
tax rate not to equal income tax expense.
8
CHEN CLASS NOTES: DEFERRED TAXES
Net Operating Loss (NOL) – negative taxable income.
Net Operating Loss Carry Forward – IRS allows companies to carry the NOL forward to
offset future taxable income, thereby lowering income tax payable in the carry forward
years.
EXAMPLE 3: Assume there are no permanent or temporary differences (20% tax rate).
------------------------------------------------------------------------------------------------------------------------------------------------------------------------Income Statement
Year 1
Year 2
Year 3
Year 4
Book Income
$(100)
$200
$150
($80)
Taxable income
$(300)
$50
$60
$20
NOL CF amount:
Net Tax. Income after NOL CF:
NOL Bal. after NOL CF:
DTA Bal. after NOL CF:
$50
$0
($250)
$60
$0
($190)
$20
$0
($170)
DTA
60
I.T.EXP
I.T.EXP
60
Why not Income Tax Payable.?
I.T.P.
DTA
10 plug
0
10
I.T.EXP
I.T.P.
DTA
12 plug
0
12
I.T.EXP
I.T.P.
DTA
4 plug
0
4
w/o NOL CF, I.T.P would have been
w/o NOL CF, I.T.P would have been
w/o NOL CF, I.T.P would have been
Year 1 GAAP Income Statement
Year 2 GAAP Income Statement
Year 3 GAAP Income Statement
Year 4 GAAP Income Statement
Income before taxes
Income tax benefit
(100)
60
Income before taxes
Income tax expense
Income before taxes
Income tax expense
Income before taxes
Income tax expense
(80)
(4)
Net Loss
(40)
Net Income
Net Loss
(84)
200
(10)
190
Net Income
OTHER ISSUES: Deferred Tax Asset Valuation Allowance
150
(12)
138
HUGE JUDGMENT ISSUE FOR COMPANIES.
Hard one too…
What if you don’t that think DTA will materialize?? (see Amazon.com example on next
page)
A DTA implies the firm has paid more in taxes than is economically owed, so it will
pay less taxes in the future (reduce future I.T.P.)
But what if the firm is not profitable in the future? Then it will never get to “use” the
DTA – need to do write down DTA and record a DTA Valuation Allowance.
9
CHEN CLASS NOTES: DEFERRED TAXES
EXAMPLE 4: AMAZON.COM WAY BACK WHEN!!
2002
Net loss
$ (149,132)
Years Ended December 31,
2001
(In thousands, except per share data)
$ (567,277)
2000
$ (1,411,273)
Note 13 — Income Taxes
The Company has provided for current and deferred U.S. federal, state and foreign income taxes for
the current and all prior periods presented. Current and deferred income taxes were provided with
respect to jurisdictions where subsidiaries of the Company produce taxable income. As of
December 31, 2002, the Company has recorded a net deferred tax asset of $3 million, which consists
primarily of certain state jurisdiction net operating loss carryforwards. The Company has provided a
valuation allowance for the remainder of its deferred tax asset, consisting primarily of net operating
loss carryforwards, because of uncertainty regarding its realization. The increase in the valuation
allowance on the deferred tax asset was $196 million and $492 million for 2002 and 2001,
respectively.
2002
Deferred tax assets:
Net operating losses
Assets held for investment
Revenue items
Expense items
$
Total gross deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities — Expense items
Net deferred tax asset
$
December 31,
792,014
308,403
22,124
246,147
2001
$
769,632
152,502
37,834
211,310
1,368,688
(1,365,386)
1,171,278
(1,169,130)
3,302
(620)
2,148
—
2,682
$
2,148
At December 31, 2002, the Company had net operating loss carryforwards of approximately
$2.5 billion related to U.S. federal, state and foreign jurisdictions. Utilization of net operating losses,
which begin to expire at various times starting in 2010, may be subject to certain limitations under
Sections 382 and 1502 of the Internal Revenue Code of 1986, as amended, and other limitations
under state and foreign tax laws.
ASIDE: Now these numbers are $3,412 ($1,069) and $3,007 ($901) for 2015 and 2014, respectively.
10
CHEN CLASS NOTES: DEFERRED TAXES
In 2008 Citigroup booked a DTA of $44 billion when its market value was $19 billion.
QUESTION: Should investors be concerned about this? Why?
11
CHEN CLASS NOTES: DEFERRED TAXES
PART II INCOME TAX FOOTNOTE
EXAMPLE 5: THE VILLA MARIA CORP. Year T FINANCIAL STATEMENTS
Consolidated Balance Sheets (In Thousands)
ASSETS
Current Assets
December 31, Year T-1
Cash and equivalents
$ 560
Accounts receivable-trade, net
24,685
Advances to joint ventures
203
Current portion of notes receivable from
officers and shareholders
796
Inventories
78,890
Prepaid expenses and other current assets
1,186
TOTAL CURRENT ASSETS
106,320
Property, plant and equipment, net
76,772
Notes receivable from officers and
shareholders, less current portion
1,585
Other assets
10,746
Investments in joint ventures
1,473
TOTAL ASSETS
196,896
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current Liabilities
Notes payable to banks
$ -Accounts payable-trade
6,336
Accrued payroll, bonuses and benefits
5,378
Other accrued expenses
2,453
Current portion of long-term debt
3,803
Income taxes payable
2,104
Deferred revenue
1,511
TOTAL CURRENT LIABILITIES
21,585
Long-term debt, less current portion
Deferred income taxes
Deferred executive compensation
Other liabilities
TOTAL LIABILITIES
Commitments and Contingencies (Note 14)
Shareholders’ Equity:
Preferred Stock:
Authorized--5,000,000 shares
Issued and outstanding--Series A,
$77 per share, 130,000 shares in Year T-1
Class A Common Stock, without par value:
Authorized-25,000,000 shares
Issued and outstanding--3,700,000 shares in 93
Class B Common Stock, without par value:
Authorized 12,000,000 shares
Issued and outstanding--9,285,000 and
9,026,481 shares
Retained Earnings
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
December 31, Year T
$ 255
34,666
41
9
87,768
1,162
121,901
90,874
312
9,406
1,840
224,333
$1,500
6,879
5,451
2,468
9,534
2,339
1,818
29,989
107,429
6,634
4,498
456
140,602
--
84,203
7,027
5,511
828
127,558
--
10,010
--
--
32,858
5,022
41,262
56,294
14,492
49,425
96,775
198,896
224,333
12
QUESTION: Where are
the deferred taxes on this
B/S?
CHEN CLASS NOTES: DEFERRED TAXES
EXAMPLE 5: THE VILLA MARIA CORPORATION continued ...
Consolidated Statements of Income
(In Thousands except per share data)
Year T-2
Gross revenues
Less excise taxes
Net Revenues
Cost of Goods Sold
Year ended December 31
Year T-1
Year T
$125,133
4,636
120,497
65,813
$154,349
8,755
145,594
80,084
$177,748
9,608
168,140
92,979
Gross Profit
54,684
65,510
75,161
Selling, General and Administrative Expenses
39,837
44,870
52,191
Operating Income
14,847
20,640
22,970
Other income (expense):
Interest
Equity in net income of joint ventures
Minority interest
Other
(8,083)
976
725
(1,144)
(8,223)
388
-(772)
(7,486)
417
-(1,437)
7,321
3,066
12,033
4,928
14,464
5,801
$4,255
$7,105
$8,663
$ .39
$ .69
$ .83
10,780
10,233
10,385
Income before income taxes
Provision for income taxes
Net Income
Earnings per share
Weighted average number of common
shares and equivalents outstanding
See notes to consolidated financial statements.
QUESTION: What is the “Provision for Income Taxes” above?
QUESTION: What numbers comprise that Year T $5,801 “Provision for Income Taxes”
number above?
13
CHEN CLASS NOTES: DEFERRED TAXES
EXAMPLE 5: THE VILLA MARIA CORPORATION Note 10 - Income Taxes continued ...
The provision for income taxes consists of the following (in thousands):
Year ended December 31
Year T-1
Year T-2
Current
Federal
State
Deferred
Federal
State
Year T
$2,499
645
3,144
$3,070
1,011
4,081
$4,398
1,010
5,408
(65)
(13)
(78)
$3,066
665
182
847
$4,928
233
160
393
$5,801
QUESTION: What entry was made in Year T?
QUESTION: Why isn’t the $5,408 payable on the B/S?
QUESTION: What number(s) show up on the SCF?
Income tax expense differs from the amount computed by multiplying the statutory federal income tax rate times income before
taxes, due to the following:
Federal statutory rate
State income taxes,
net of federal benefit
Permanent differences
Other
Year ended December 31
Year T-2
Year T-1
Year T
34.0%
34.0%
34.0%
4.5
5.8
5.2
2.6
1.8
2.0
0.8
(0.7)
(1.1)
41.9%
40.9%
40.1%
The approximate effect of temporary differences and carryforwards that give rise to deferred tax balances at December 31, Year T1 and Year T are as follows (in thousands):
Year ended December 31
Year T-1
Year T
Gross deferred tax assets:
Liabilities and accruals
Deferred compensation
AMT credits
Gross Deferred Tax Assets
$(734)
(2,055)
(364)
(3,153)
$(1,123)
(2,526)
(161)
(3,810)
Gross deferred tax liabilities:
Property, plant and equipment
Retirement plan
Inventory
Investments in joint ventures
State taxes
Gross Deferred Tax Liabilities
Net Deferred Tax Liability
7,152
360
1,787
253
235
9,787
$6,634
7,199
399
2,459
566
214
10,837
$7,027
The Company has adopted FASB Statement No. 109 and has applied it retroactively. The Alternative Minimum Tax credits at December 31, Year T can be carried
forward indefinitely.
14
CHEN CLASS NOTES: DEFERRED TAXES
EXAMPLE 5: THE VILLA MARIA CORPORATION continued ...
Consolidated Statements of Cash Flows
(In Thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Deferred income taxes
Depreciation and amortization
Equity in net income of joint ventures
Change in minority interest
Other
Changes in assets and liabilities:
Increase in accounts receivable--trade
Increase in inventories
Increase (decrease) in other assets
Increase in accounts payable--trade and accrued expenses
Increase (decrease) in income taxes payable
Increase in deferred revenue
Increase (decrease) in deferred executive compensation
Increase (decrease) in other liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Acquisitions of property, plant and equipment
Acquisition of the remaining 60% interest in Vichon Associates
Distributions from joint ventures
Contributions to joint ventures
Net cash used in investing activities
Cash flows from financing activities:
Repayments of notes receivable from officers and shareholders
Net additions (repayments) under notes payable to banks
Proceeds from issuance of long-term debt
Principal repayments of long-term debt
Proceeds from issuance of Class A Common Stock
Payment of Series A Preferred Stock dividends
Other
Net cash provided by financing activities
Net decrease in cash
Cash at the beginning of the year
Cash at the end of the year
Year Ended December 31,
Year T-2
Year T-1
Year T
$ 4,255
$ 7,105
$ 8,663
(78)
6,145
(976)
(725)
48
847
7,082
(388)
0
111
393
7,763
(417)
0
116
(413)
(4,589)
18
1,343
(419)
287
448
823
(7,606)
(11,235)
249
1,847
1,508
475
(5)
(702)
(9,981)
(6,817)
(104)
617
235
307
1,013
(135)
6,167
(712)
1,653
(14,791)
0
380
(2,150)
(16,561)
(8,960)
(921)
404
(200)
(9,677)
(14,369)
0
465
0
(13,904)
977
12,075
6,299
(8,074)
0
(780)
(120)
10,377
(17)
1,035
$ 1,018
76
13,030
2,950
(5,600)
0
(500)
(25)
9,931
(458)
1,018
$ 560
2,060
(18,950)
1,977
(4,756)
32,318
(500)
(203)
11,946
(305)
560
$ 255
QUESTION: What do you think analysts look for when analyzing the income tax
disclosures?
15
CHEN CLASS NOTES: DEFERRED TAXES
Recent academic evidence: CSR ratings and Effective Tax Rates
Firms with higher CSR ratings (Apple, Google, Amazon) often pay lower taxes.
QUESTION: What are managers’ incentives when it comes to the payment of taxes? Should
firms’ CSR ratings factor in firms’ tax rates (and potential tax avoidance activities)?
SIDENOTE: the Tax Cut and Jobs Act of 2017 (TCJA)
• The TCJA did not alter U.S. GAAP, but because of the way tax law interacts
with financial reporting, the changes do affect firms’ financial statements.
• Main changes include the following:
– Tax Rate Change: The corporate tax rate was reduced from 35% to 21%
– Foreign Earnings: the new tax law moved the U.S. from a worldwide tax system
to a territorial system. It also imposed a one time tax on any income of foreign
subsidiaries of U.S. companies that had not yet been taxed by the U.S. as of the
end of the 2017 tax year because it had not yet been repatriated
– NOLs: The option to carryback NOLs was eliminated.
– Other change to interest deductions, bonus depreciation, etc.
16
CHEN CLASS NOTES: DEFERRED TAXES
DEFERRED TAXES PROBLEM A – WORK BACKWARDS
MICROSOFT, Year-end is 6/30/2013. All amounts are in millions, except for per share
information.
INCOME STATEMENTS
Year Ended June 30,
2013
2012
77,849 $
73,723 $
69,943
Cost of revenue
20,249
17,530
15,577
Gross profit
Operating expenses:
57,600
56,193
54,366
Research and development
10,411
9,811
9,043
Sales and marketing
15,276
13,857
13,940
5,149
4,569
4,222
0
6,193
0
30,836
34,430
27,205
26,764
21,763
27,161
288
504
910
27,052
22,267
28,071
5,189
5,289
4,921
Revenue
$
General and administrative
Goodwill impairment
Total operating expenses
Operating income
Other income
Income before income taxes
Provision for income taxes
Net income
$
21,863 $
2011
16,978 $
23,150
----------------------------------------------------------------------BALANCE SHEETS
June 30,
2013
Assets
Current assets:
Cash and cash equivalents
$
Short-term investments (including securities loaned of $579 and $785)
Total cash, cash equivalents, and short-term investments
Accounts receivable, net of allowance for doubtful accounts of $336 and $389
Inventories
Deferred income taxes
Other
Total current assets
Property and equipment, net of accumulated depreciation of $12,513 and
$10,962
Equity and other investments
Goodwill
Intangible assets, net
Other long-term assets
Total assets
$
17
3,804
73,218
77,022
17,486
1,938
1,632
3,388
101,466
9,991
10,844
14,655
3,083
2,392
142,431
2012
$
$
6,938
56,102
63,040
15,780
1,137
2,035
3,092
85,084
8,269
9,776
13,452
3,170
1,520
121,271
CHEN CLASS NOTES: DEFERRED TAXES
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Current portion of long-term debt
Accrued compensation
Income taxes
Short-term unearned revenue
Securities lending payable
Other
Total current liabilities
Long-term debt
Long-term unearned revenue
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Common stock and paid-in capital – shares authorized 24,000;
outstanding 8,328 and 8,381
Retained earnings (deficit)
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
4,828
2,999
4,117
592
20,639
645
3,597
37,417
12,601
1,760
1,709
10,000
63,487
67,306
9,895
1,743
78,944
142,431
$
$
4,175
1,231
3,875
789
18,653
814
3,151
32,688
10,713
1,406
1,893
8,208
54,908
65,797
(856)
1,422
66,363
121,271
$
NOTE 13 — INCOME TAXES (In Part)
The components of the provision for income taxes were as follows:
(In millions)
Year Ended June 30,
2013
2012
2011
Current Taxes
U.S. federal
$
3,131
U.S. state and local
$
2,235 $
3,108
332
153
209
International
1,745
1,947
1,602
Current taxes
Deferred Taxes
5,208
4,335
4,919
(19)
954
2
Deferred taxes
Provision for income
taxes
$
5,189
$
5,289 $
4,921
The components of the deferred income tax assets and liabilities were as follows:
(In millions)
June 30,
Deferred Income Tax Assets
Stock-based compensation expense
Other expense items
Unearned revenue
Impaired investments
2013
$
888
917
445
246
18
2012
$
882
965
571
152
CHEN CLASS NOTES: DEFERRED TAXES
Loss carryforwards
Other revenue items
Deferred income tax assets
Less valuation allowance
Deferred income tax assets, net of
valuation allowance
715
55
3,266
(579)
$
$
532
79
3,181
(453)
$
2,687
$
2,728
$
$
$
(1,146)
(1,012)
(604)
(2)
(2,764)
$
(1,072)
(830)
(670)
(14)
(2,586)
$
(77)
$
142
Deferred Income Tax Liabilities
International earnings
Unrealized gain on investments
Depreciation and amortization
Other
Deferred income tax liabilities
Net deferred income tax assets
(liabilities)
REQUIRED:
1. What entry was made for income taxes in fiscal year 2013?
2. Where does the net deferred tax liability of $77 million at June 30th, 2013, appear on
the balance sheet?
3. Why does Microsoft have an allowance for its deferred tax assets?
4. How much cash was spent or received in 2013 for taxes? Can you tell from the
information given above?
5. What is the composition (current/deferred) of the fiscal year 2013 income tax
provision?
6. Microsoft has a sizeable net deferred tax asset on its balance sheet. Is this “asset” a
sign of optimal tax planning?
7. Why are tax reconciling items such as municipal bond interest revenue, half of meals
and entertainment, and fines not listed among the components of the deferred taxes?
19