Income Tax Accounting Bosco Moose · PDF fileIncome Tax Accounting and Reporting. ... alternative minimum tax credit carryforwards (FAS 109 ¶ 19) ... Net Operating Loss

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Income Tax Accounting and ReportingIncome Tax Accounting and Reporting

.

William J. Bosco

Consultant

Alan L. Moose

Division Controller, U.S.

John Deere Credit

Equipment Leasing Association Lease Accountants Conference

September 21, 2004

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Topics CoveredTopics Covered

•• Overview of Accounting for Income TaxesOverview of Accounting for Income Taxes

•• Terms and DefinitionsTerms and Definitions

•• Tax Provision CalculationTax Provision Calculation

•• Income Tax Provision Calculation ExamplesIncome Tax Provision Calculation Examples

•• Presentation and DisclosurePresentation and Disclosure

•• Sample Tax FootnotesSample Tax Footnotes

•• Recent Developments in Accounting for Income Recent Developments in Accounting for Income TaxesTaxes

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Overview Overview -- HistoryHistory

The Standards for Accounting for Income Taxes are as The Standards for Accounting for Income Taxes are as follows: follows:

–– APB 11APB 11-- Issued in December 1967 Issued in December 1967 –– an income statement an income statement oriented approachoriented approach

–– FAS 96 FAS 96 –– Issued in December 1987 Issued in December 1987 –– a balance sheet a balance sheet oriented approach oriented approach -- effective date was for the years effective date was for the years beginning after 12/15/1988beginning after 12/15/1988•• FASB 100 delayed the effective date one year until 12/15/1989FASB 100 delayed the effective date one year until 12/15/1989•• FASB 103 delayed the effective date two more years until FASB 103 delayed the effective date two more years until

12/15/9112/15/91•• FASB 108 delayed the effective date one more year until FASB 108 delayed the effective date one more year until

12/15/9212/15/92

–– FAS 109 FAS 109 –– Issued in February 1992 Issued in February 1992 –– a simplified balance a simplified balance sheet oriented approachsheet oriented approach•• Implementation Guide issued in March 1992 Implementation Guide issued in March 1992 –– revised in revised in

December 1998 and September 2001December 1998 and September 2001

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Overview Overview –– FASB 109 FASB 109 -- ScopeScope

Statement defines the financial accounting and Statement defines the financial accounting and reporting for income taxes that are currently payable reporting for income taxes that are currently payable and for the tax consequences of the following:and for the tax consequences of the following:

–– Revenues, expenses, gains, or losses that are included in Revenues, expenses, gains, or losses that are included in taxable income of an earlier or later year than the year in taxable income of an earlier or later year than the year in which they are recognized in financial income which they are recognized in financial income

–– Other events that create differences between the tax bases Other events that create differences between the tax bases of assets and liabilities and their amounts for financial of assets and liabilities and their amounts for financial reporting reporting

–– Operating loss or tax credit carrybacks for refunds of taxes Operating loss or tax credit carrybacks for refunds of taxes paid in prior years and carryforwards to reduce taxes paid in prior years and carryforwards to reduce taxes payable in future years. (FAS 109 ¶ 3)payable in future years. (FAS 109 ¶ 3)

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Statement is applicable to the following:Statement is applicable to the following:–– Domestic federal (national) income taxes (U.S. federal Domestic federal (national) income taxes (U.S. federal

income taxes for U.S. enterprises) and foreign, state, and income taxes for U.S. enterprises) and foreign, state, and local (including franchise) taxes based on income local (including franchise) taxes based on income

–– An enterprise's domestic and foreign operations that are An enterprise's domestic and foreign operations that are consolidated, combined, or accounted for by the equity consolidated, combined, or accounted for by the equity methodmethod

–– Foreign enterprises in preparing financial statements in Foreign enterprises in preparing financial statements in accordance with U.S. generally accepted accounting accordance with U.S. generally accepted accounting principles. (FAS 109 ¶ 4)principles. (FAS 109 ¶ 4)

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Items that are outside of the Statement’s scope are as Items that are outside of the Statement’s scope are as follows:follows:

–– The basic methods of accounting for the U.S. federal The basic methods of accounting for the U.S. federal investment tax credit (ITC) and for foreign, state, and local investment tax credit (ITC) and for foreign, state, and local investment tax credits or grants investment tax credits or grants

–– Discounting Discounting

–– Accounting for income taxes in interim periods (other than Accounting for income taxes in interim periods (other than the criteria for recognition of tax benefits and the effect of the criteria for recognition of tax benefits and the effect of enacted changes in tax laws or rates and changes in enacted changes in tax laws or rates and changes in valuation allowances). (FAS 109 ¶ 5)valuation allowances). (FAS 109 ¶ 5)

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Overview Overview –– FASB 109 FASB 109 -- ObjectivesObjectives

The two major objectives of the Statement are to The two major objectives of the Statement are to recognize the following items:recognize the following items:

–– the amount of income taxes payable or refundable in the the amount of income taxes payable or refundable in the current period (the current provision)current period (the current provision)

–– deferred tax liabilities and assets for the future tax deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an consequences of events that have been recognized in an enterprise’s financial statements or tax returns. (the deferred enterprise’s financial statements or tax returns. (the deferred provision) (FAS 109 ¶ 7)provision) (FAS 109 ¶ 7)

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Overview Overview –– FASB 109 FASB 109 -- PrinciplesPrinciples

Following are the basic principles applied at each Following are the basic principles applied at each financial statement date:financial statement date:

–– A current tax liability or asset is recognized for the estimatedA current tax liability or asset is recognized for the estimatedtaxes payable or refundable on tax returns for the current taxes payable or refundable on tax returns for the current year.year.

–– A deferred tax liability or asset is recognized for the A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary estimated future tax effects attributable to temporary differences and carryforwards.differences and carryforwards.

–– The measurement of current and deferred tax liabilities and The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not effects of future changes in tax laws or rates are not anticipated.anticipated.

–– The measurement of deferred tax assets is reduced, if The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. (FAS available evidence, are not expected to be realized. (FAS 109 ¶ 8)109 ¶ 8)

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FASB 109 FASB 109 -- TermsTerms

Temporary DifferencesTemporary Differences–– A difference between the tax basis of an asset or liability and A difference between the tax basis of an asset or liability and

its reported amount in the financial statements that will resultits reported amount in the financial statements that will resultin taxable or deductible amounts in future years when the in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or reported amount of the asset or liability is recovered or settled, respectively.settled, respectively.•• Revenues or gains that are taxable after they are recognized in Revenues or gains that are taxable after they are recognized in

financial income financial income –– i.e. i.e. –– tax gains deferred through liketax gains deferred through like--kind kind exchangeexchange

•• Expenses or losses that are deductible after they are Expenses or losses that are deductible after they are recognized in financial income recognized in financial income –– i.e. i.e. –– increases in the increases in the allowance for credit losses charged to the provisionallowance for credit losses charged to the provision

•• Revenues or gains that are taxable before they are recognized Revenues or gains that are taxable before they are recognized in financial income in financial income –– i.e. i.e. –– advance rentsadvance rents

•• Expenses or losses that are deductible before they are Expenses or losses that are deductible before they are recognized in the financial statements recognized in the financial statements –– i.e. i.e. –– accelerated tax accelerated tax depreciationdepreciation

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Current Tax Expense or BenefitCurrent Tax Expense or Benefit–– The amount of income taxes paid or payable (or refundable) The amount of income taxes paid or payable (or refundable)

for a year as determined by applying the provisions of the for a year as determined by applying the provisions of the enacted tax law to the taxable income or excess of enacted tax law to the taxable income or excess of deductions over revenues for that year. (FAS 109 ¶ 289)deductions over revenues for that year. (FAS 109 ¶ 289)

Deferred Tax AssetDeferred Tax Asset–– A difference between the tax basis of an asset or liability and A difference between the tax basis of an asset or liability and

its reported amount in the financial statements that will resultits reported amount in the financial statements that will resultin taxable or deductible amounts in future years when the in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or reported amount of the asset or liability is recovered or settled, respectively. (FAS 109 ¶ 289)settled, respectively. (FAS 109 ¶ 289)

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Deferred Tax LiabilityDeferred Tax Liability–– The deferred tax consequences attributable to taxable The deferred tax consequences attributable to taxable

temporary differences. A deferred tax liability is measured temporary differences. A deferred tax liability is measured using the applicable enacted tax rate and provisions of the using the applicable enacted tax rate and provisions of the enacted tax law. (FAS 109 ¶ 289) enacted tax law. (FAS 109 ¶ 289)

Carrybacks and CarryforwardsCarrybacks and Carryforwards–– Deductions or credits that cannot be utilized on the tax Deductions or credits that cannot be utilized on the tax

return during a year that may be carried back to reduce return during a year that may be carried back to reduce taxable income or taxes payable in a prior year.taxable income or taxes payable in a prior year.

–– Deductions or credits that cannot be utilized on the tax Deductions or credits that cannot be utilized on the tax return during a year that may be carried forward to reduce return during a year that may be carried forward to reduce taxable income or taxes payable in a future year. (FAS109 ¶ taxable income or taxes payable in a future year. (FAS109 ¶ 289)289)

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Valuation AllowanceValuation Allowance–– The portion of a deferred tax asset for which it is more likely The portion of a deferred tax asset for which it is more likely than than

not that a tax benefit will not be realized.not that a tax benefit will not be realized.

SchedulingScheduling–– Preparing a proforma income tax return for future years to Preparing a proforma income tax return for future years to

determine the reversal of temporary differences and the ability determine the reversal of temporary differences and the ability to to utilize carryforwards. Used to determine if a valuation allowanutilize carryforwards. Used to determine if a valuation allowance is ce is necessary.necessary.

Applicable Tax RateApplicable Tax Rate–– the enacted tax rate(s) expected to apply to taxable income in tthe enacted tax rate(s) expected to apply to taxable income in the he

periods in which the deferred tax liability or asset is expectedperiods in which the deferred tax liability or asset is expected to be to be settled or realized (FAS 109 ¶18)settled or realized (FAS 109 ¶18)

–– In the U.S. federal tax jurisdiction, the applicable tax rate isIn the U.S. federal tax jurisdiction, the applicable tax rate is the the regular tax rate, and a deferred tax asset is recognized for regular tax rate, and a deferred tax asset is recognized for alternative minimum tax credit carryforwards (FAS 109 ¶ 19)alternative minimum tax credit carryforwards (FAS 109 ¶ 19)

–– A combined federal and state rate can be used if there is littleA combined federal and state rate can be used if there is littlevariation between the tax laws. (Implementation Guide)variation between the tax laws. (Implementation Guide)

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NetNet Operating LossOperating Loss

•• A tax position where a company has negative taxable A tax position where a company has negative taxable income. Under US rules an NOL can be carried back income. Under US rules an NOL can be carried back to offset previous years’ taxable income to generate a to offset previous years’ taxable income to generate a refund. If an NOL still exists it is carried forward to refund. If an NOL still exists it is carried forward to offset future years’ taxable income. offset future years’ taxable income.

•• Customers often lease when they have an NOL to Customers often lease when they have an NOL to lower their afterlower their after--tax cost of financing equipment. If a tax cost of financing equipment. If a customer has a large NOL carry forward it means it customer has a large NOL carry forward it means it can’t take advantage of tax benefits such as the can’t take advantage of tax benefits such as the accelerated depreciation write offs (MACRS accelerated depreciation write offs (MACRS deductions) in the current year. deductions) in the current year.

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Alternative minimum taxAlternative minimum tax

•• US tax provisions to cause companies with US tax provisions to cause companies with significant tax benefits preferences or credits to pay significant tax benefits preferences or credits to pay a minimum tax. The AMT is calculated by adding a minimum tax. The AMT is calculated by adding adjustments for preference items to regular taxable adjustments for preference items to regular taxable income and applying a 20% AMT rate to the AMT income and applying a 20% AMT rate to the AMT income.income.

•• Paying the AMT generates a credit (excess of AMT Paying the AMT generates a credit (excess of AMT over regular tax). AMT credits can be carried over regular tax). AMT credits can be carried forward and applied to reduce regular tax in the forward and applied to reduce regular tax in the future when it exceeds AMT. Accelerated future when it exceeds AMT. Accelerated depreciation is a preference item, thus leasing depreciation is a preference item, thus leasing equipment rather than buying equipment helps equipment rather than buying equipment helps reduce AMT.reduce AMT.

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FASB 109 FASB 109 –– Tax Provision CalculationTax Provision Calculation

Total income tax expense or benefit for the year is the Total income tax expense or benefit for the year is the sum of i) deferred tax expense or benefit and ii) income sum of i) deferred tax expense or benefit and ii) income taxes currently payable or refundable.taxes currently payable or refundable.

Income taxes currently payable or refundable is the Income taxes currently payable or refundable is the amount of income taxes paid or payable (or refundable) amount of income taxes paid or payable (or refundable) for a year as determined by applying the provisions of for a year as determined by applying the provisions of the enacted tax law to the taxable income or excess of the enacted tax law to the taxable income or excess of deductions over revenues for that year.deductions over revenues for that year.

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Deferred Tax Provision CalculationDeferred Tax Provision Calculation

Steps to calculate the deferred tax provisionSteps to calculate the deferred tax provision

•• Identify (1) the types and amounts of existing Identify (1) the types and amounts of existing temporary differences and (2) the nature and amount temporary differences and (2) the nature and amount of each type of operating loss and tax credit of each type of operating loss and tax credit carryforward and the remaining length of the carryforward and the remaining length of the carryforward periodcarryforward period

•• Measure the total deferred tax liability for taxable Measure the total deferred tax liability for taxable temporary differences using the applicable tax rate temporary differences using the applicable tax rate

•• Measure the total deferred tax asset for deductible Measure the total deferred tax asset for deductible temporary differences and operating losstemporary differences and operating losscarryforwards using the applicable tax ratecarryforwards using the applicable tax rate

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Deferred Tax Provision Calculation Deferred Tax Provision Calculation --ContinuedContinued

•• Measure deferred tax assets for each type of tax Measure deferred tax assets for each type of tax credit carryforwardcredit carryforward

•• Reduce deferred tax assets by a valuation Reduce deferred tax assets by a valuation allowance if, based on the weight of available allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the more than 50 percent) that some portion or all of the deferred tax assets will not be realized. The deferred tax assets will not be realized. The valuation allowance should be sufficient to reduce valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more the deferred tax asset to the amount that is more likely than not to be realized. (FAS 109 ¶17)likely than not to be realized. (FAS 109 ¶17)

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1. Assume an operating lease for GAAP purposes and a true lease1. Assume an operating lease for GAAP purposes and a true lease for income purposes.for income purposes.Lessor enters into a 60Lessor enters into a 60--month FMV lease of material handling equipment, having a cost ofmonth FMV lease of material handling equipment, having a cost of $1$1

million, monthly rent of $18,500, a residual of $200,000, and anmillion, monthly rent of $18,500, a residual of $200,000, and an implicit interest rate of 10%. implicit interest rate of 10%.

The first basic rent date is April 1, 1996.The first basic rent date is April 1, 1996.

There is no automatic transfer of ownership.There is no automatic transfer of ownership.

There is no bargain purchase option.There is no bargain purchase option.

The equipment has an economic life of 10 years, therefore the leThe equipment has an economic life of 10 years, therefore the lease term of 5 years is less than 75% of ase term of 5 years is less than 75% of thethe

economic life. The PV of the rents at the implicit rate of 10%economic life. The PV of the rents at the implicit rate of 10% is $878,000, which is less than 90% of the is $878,000, which is less than 90% of the cost cost

the equipment. Therefore, the lease is an operating lease for fthe equipment. Therefore, the lease is an operating lease for financial reporting purposes.inancial reporting purposes.

2. Material handling equipment (generally) is five2. Material handling equipment (generally) is five--year class property. MACRS depreciation rates (from year class property. MACRS depreciation rates (from the the

IRS table) are (excludes 50% bonus depreciation):IRS table) are (excludes 50% bonus depreciation):YearYear %%19961996 20.00 20.00 19971997 32.0032.0019981998 19.2019.2019991999 11.5211.5220002000 11.5211.5220012001 5.765.76

Tax ProvisionTax Provision -- Operating Lease ExampleOperating Lease Example

An example comparing book income to taxable income for an operating lease:

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Tax Provision - Operating Lease Example

From the standpoint of the lessor, the lease will have the following earnings pattern:Year ended December 31

Tax Books 1996 1997 1998 1999 2000 2001 TotalRental Income $166,500 $222,000 $222,000 $222,000 $222,000 $55,500 $1,110,000

Sale Proceeds 200,000 200,000

Depreciation Expense 200,000 320,000 192,000 115,200 115,200 57,600 1,000,000

Tax Income (Loss) (33,500) (98,000) 30,000 106,800 106,800 197,900 310,000

Tax Rate 40% (CombinedFederal & State Rate) 40% 40% 40% 40% 40% 40% 40%

Tax Liability (Savings) ($13,400) ($39,200) $12,000 $42,720 $42,720 $79,160 $124,000

GAAP Books

Rental Income $166,500 $222,000 $222,000 $222,000 $222,000 $55,500 $1,110,000



Income before Tax 46,500 62,000 62,000 62,000 62,000 15,500 310,000

Tax Expense @ 40% 18,600 24,800 24,800 24,800 24,800 6,200 124,000

Net Income $27,900 $37,200 $37,200 $37,200 $37,200 $9,300 $186,000

Current Tax Liability 13,400 39,200 (12,000) (42,720) (42,720) (79,160) (124,000)

Deferred Tax Balance (32,000) (96,000) (108,000) (90,880) (72,960) 0 0

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Tax Provision – Operating Lease Example

Operating Lease Tax Provision Calculation

1996 1997 1998 1999 2000 2001

Equipment Tax Basis 800,000 480,000 288,000 172,800 57,600 -

Equipment Book Basis 880,000 720,000 560,000 400,000 240,000 -

Taxable Temporary Difference (80,000) (240,000) (272,000) (227,200) (182,400) -

Applicable tax rate 40% 40% 40% 40% 40% 40%

Deferred tax liability (32,000) (96,000) (108,800) (90,880) (72,960) -

Current tax receivable/(payable) 13,400 39,200 (12,000) (42,720) (42,720) (79,160)

Change in the Deferred Tax Liability (32,000) (64,000) (12,800) 17,921 17,920 72,960 (Deferred Tax Expense)Total Income Tax Provision (18,600) (24,800) (24,800) (24,800) (24,800) (6,200)

The deferred tax provision is calculated by identifying the temporary differences and carryforwards.

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Tax Provision - Operating Lease Example

A simple GAAP balance sheet presentation of the lease:

Year ended December 31GAAP Books 1996 1997 1998 1999 2000 2001

Cash $179,900 $441,100 $651,100 $830,380 $1,009,660 $1,186,000

Equipment under lease 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 0

Accumulated depreciation (120,000) (280,000) (440,000) (600,000) (760,000) 0

Equipment under lease, net 880,000 720,000 560,000 400,000 240,000 0

Total Assets $1,059,900 $1,161,100 $1,211,100 $1,230,380 $1,249,660 $1,186,000

Deferred Taxes 32,000 96,000 108,800 90,880 72,960 0

Stockholder’s Equity 1,027,900 1,065,100 1,102,300 1,139,500 1,176,700 1,186,000

Total Liabilities & Equity $1,059,900 $1,161,100 $1,211,100 $1,230,380 $1,249,660 $1,186,000

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1. Assume an direct finance lease for GAAP purposes and a true 1. Assume an direct finance lease for GAAP purposes and a true lease for income purposes.lease for income purposes.–– Lessor enters into a 60 month FMV lease of material handling equLessor enters into a 60 month FMV lease of material handling equipment, having a cost of $1 ipment, having a cost of $1

million, monthly rent of $20,087, a residual of $100,000, and anmillion, monthly rent of $20,087, a residual of $100,000, and an implicit interest rate of 10.25%. implicit interest rate of 10.25%. The first basic rent date is April 1, 1996.The first basic rent date is April 1, 1996.

–– There is no automatic transfer of ownership.There is no automatic transfer of ownership.

–– There is no bargain purchase option.There is no bargain purchase option.

–– The equipment has an economic life of 10 years, therefore the leThe equipment has an economic life of 10 years, therefore the lease term of 5 years is less ase term of 5 years is less than 75% of the economic life. The PV of the rents at the implithan 75% of the economic life. The PV of the rents at the implicit rate of 10% is $939,970, cit rate of 10% is $939,970, which is more than 90% of the cost of the equipment. Therefore, which is more than 90% of the cost of the equipment. Therefore, the lease is a direct finance the lease is a direct finance lease for financial reporting purposes.lease for financial reporting purposes.

2. Material handling equipment (generally) is five2. Material handling equipment (generally) is five--year class property. MACRS depreciation rates year class property. MACRS depreciation rates (from the (from the

IRS table) are (excluding 50% bonus depreciation):IRS table) are (excluding 50% bonus depreciation):YearYear 50% Bonus50% Bonus19961996 20.00%20.00%19971997 32.00%32.00%19981998 19.20%19.20%19991999 11.52%11.52%20002000 11.52%11.52%20012001 5.76%5.76%

Tax ProvisionTax Provision –– Direct Finance Lease ExampleDirect Finance Lease Example

An example comparing book income to taxable income for direct finance lease:

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Tax Provision - Direct Finance Lease Example

From the standpoint of the lessor, the direct finance lease will have the following earnings pattern:

Year ended December 31Tax Books 1996 1997 1998 1999 2000 2001 TotalRental Income $180,786 $241,049 $241,049 $241,049 $241,049 $60,263 $1,205,245



Tax Income (Loss) (19,214) (78,951) 49,049 125,849 125,849 102,663 305,245

Tax Rate 40% (CombinedFederal & State Rate) 40% 40% 40% 40% 40% 40% 40%

Tax Liability (Savings) ($7,686) ($31,580) $19,620 $50,340 $50,340 $41,065 $122,098

GAAP Books

Rental Income $73,253 $84,247 $67,398 $48,738 $28,074 $3,534 $305,244

Sale Proceeds

Depreciation Expense 0 0 0 0 0 0 0

Income before Tax 73,253 84,247 67,398 48,738 28,074 3,534 305,244

Tax Expense @ 40% 29,301 33,699 26,959 19,495 11,230 1,414 122,098

Net Income $43,952 $50,548 $40,439 $29,243 $16,844 $2,120 $183,146

Current Tax Receivable (Liabili 7,686 31,580 (19,620) (50,340) (50,340) (41,065) (122,098)

Deferred Tax (liability) balance (36,987) (102,266) (109,065) (78,760) (39,650) 0 0

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Tax Provision – Direct Finance Lease Example

Direct Finance Lease Tax Provision Calculation

1996 1997 1998 1999 2000 2001

Equipment Tax Basis 800,000 480,000 288,000 172,800 57,600 -

Lease Book Basis 892,467 735,665 562,014 369,703 156,728 -

Taxable Temporary Difference (92,467) (255,665) (274,014) (196,903) (99,128) -

Applicable tax rate 40% 40% 40% 40% 40% 40%

Deferred tax liability (36,987) (102,266) (109,605) (78,760) (39,650) -

Current tax receivable/(payable) 7,686 31,580 (19,620) (50,340) (50,340) (41,065)

Change in the Deferred Tax Liability (36,987) (65,279) (7,339) 30,845 39,110 39,650 (Deferred Tax Expense)Total Income Tax Provision (29,301) (33,699) (26,959) (19,495) (11,230) (1,414)

The deferred tax provision is calculated by identifying the temporary differences and carryforwards.

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Tax Provision - Direct Finance Lease Example

A simple GAAP balance sheet presentation of the lease:

Cash $188,472 $461,101 $682,530 $873,239 $1,063,948 $1,183,146

Gross Receivable 1,024,457 783,409 542,360 301,311 60,262 0

Unearned Income (231,990) (147,744) (80,346) (31,608) (3,534) 0

Residual 100,000 100,000 100,000 100,000 100,000 0

Net Investment, Leases 892,467 735,665 562,014 369,703 156,728 0

Total Assets $1,080,939 $1,196,766 $1,244,544 $1,242,942 $1,220,676 $1,183,146

Deferred Taxes 36,987 102,266 109,605 78,760 39,650 0

Stockholder’s Equity 1,043,952 1,094,500 1,134,939 1,164,182 1,181,026 1,183,146

Total Liabilities & Equity $1,080,939 $1,196,766 $1,244,544 $1,242,942 $1,220,676 $1,183,146

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FASB 109 FASB 109 –– PresentationPresentation

Balance Sheet PresentationBalance Sheet Presentation

•• In a classified balance sheet, the deferred tax liabilities and In a classified balance sheet, the deferred tax liabilities and assets are separated into a current amount and aassets are separated into a current amount and a noncurrent noncurrent amount. Deferred tax liabilities and assets will be classified amount. Deferred tax liabilities and assets will be classified as as current orcurrent or noncurrent based on the classification of the related noncurrent based on the classification of the related asset or liability for financial reporting. (FAS 109 ¶ 41)asset or liability for financial reporting. (FAS 109 ¶ 41)

•• For a particular taxFor a particular tax--paying component of an enterprise and paying component of an enterprise and within a particular tax jurisdiction, (a) all current deferred twithin a particular tax jurisdiction, (a) all current deferred tax ax liabilities and assets shall be offset and presented as a singleliabilities and assets shall be offset and presented as a singleamount and (b) allamount and (b) all noncurrent deferred tax liabilities and assets noncurrent deferred tax liabilities and assets shall be offset and presented as a single amount. However, an shall be offset and presented as a single amount. However, an enterprise shall not offset deferred tax liabilities and assets enterprise shall not offset deferred tax liabilities and assets attributable to different taxattributable to different tax--paying components of the enterprise paying components of the enterprise or to different tax jurisdictions.(FAS 109 ¶ 42)or to different tax jurisdictions.(FAS 109 ¶ 42)

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FASB 109 FASB 109 –– DisclosureDisclosure

The components of the net deferred tax liability or asset The components of the net deferred tax liability or asset recognized is disclosed as follows:recognized is disclosed as follows:

–– The total of all deferred tax liabilitiesThe total of all deferred tax liabilities

–– The total of all deferred tax assets The total of all deferred tax assets

–– The total valuation allowance recognized for deferred tax The total valuation allowance recognized for deferred tax assets assets

The net change during the year in the total valuation The net change during the year in the total valuation allowance also shall be disclosed.allowance also shall be disclosed.

The approximate tax effect of each type of temporary The approximate tax effect of each type of temporary difference and carryforward that gives rise to a difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred significant portion of deferred tax liabilities and deferred tax assets. (FAS 109 ¶43) tax assets. (FAS 109 ¶43)

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FASB 109 FASB 109 –– Disclosure Disclosure -- ContinuedContinued

The significant components of income tax expense from continuingThe significant components of income tax expense from continuingoperations, such as:operations, such as:

–– Current tax expense or benefitCurrent tax expense or benefit–– Deferred tax expense or benefit (exclusive of the effects of othDeferred tax expense or benefit (exclusive of the effects of other er

components listed below)components listed below)–– Investment tax creditsInvestment tax credits–– The benefits of operating loss carryforwardsThe benefits of operating loss carryforwards–– Tax expense that results from allocating certain tax benefits eiTax expense that results from allocating certain tax benefits either ther

directly to contributed capital or to reduce goodwill or otherdirectly to contributed capital or to reduce goodwill or othernoncurrent intangible assets of an acquired entitynoncurrent intangible assets of an acquired entity

–– Adjustments of a deferred tax liability or asset for enacted chaAdjustments of a deferred tax liability or asset for enacted changes nges in tax laws or rates or a change in the tax status of the enterpin tax laws or rates or a change in the tax status of the enterpriserise

–– Adjustments of the beginningAdjustments of the beginning--ofof--thethe--year balance of a valuation year balance of a valuation allowance because of a change in circumstances that causes a allowance because of a change in circumstances that causes a change in judgment about the realizability of the related deferrchange in judgment about the realizability of the related deferred ed tax asset in future years.tax asset in future years.

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FASB 109 FASB 109 –– Disclosure Disclosure -- ContinuedContinued

•• A reconciliation using percentages or dollar amounts A reconciliation using percentages or dollar amounts (a) the reported amount of income tax expense (a) the reported amount of income tax expense attributable to continuing operations for the year to attributable to continuing operations for the year to (b) the amount of income tax expense that would (b) the amount of income tax expense that would result from applying domestic federal statutory tax result from applying domestic federal statutory tax rates to pretax income from continuing operations. rates to pretax income from continuing operations. (FASB 109 ¶47)(FASB 109 ¶47)

•• The amounts and expiration dates of operating loss The amounts and expiration dates of operating loss and tax credit carryforwards.and tax credit carryforwards.

•• The portion of the valuation allowance allocated to The portion of the valuation allowance allocated to goodwill or intangible assets. (FASB 109 ¶ 48)goodwill or intangible assets. (FASB 109 ¶ 48)

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ABC Corporation

2003 2002 2001Current:

Federal(a) ($5,710) ($169,073) ($154,680)State 743 -1,575 -1,122Foreign 993 1,145 -42

(3,974) (169,503) (155,844)Deferred(b):

Federal 234,580 426,398 405,287State 4,755 7,884 2,376

239,335 434,282 407,663$235,361 $264,779 $251,819

Note I — Income Taxes

The provision (benefit) for income taxes is comprised of the following:

(a) Including U.S. tax on foreign income

(b) Deferred taxes were also provided (charged) to other comprehensive income of $(77,572) (2003), $47,380 (2002) and $(32,661) (2001), respectively, and for cumulative effect of accounting change of $4,653 (2003) and $8,180 (2001).

The deferred tax liability consists of the following deferred tax liabilities (assets):

2003 2002Accelerated depreciation on flight equipment $2,671,813 $2,301,339Excess of state income taxes not currently deductible for Federal income tax purposes (11,216) (9,227)Tax versus book lease differences — 125,450Provision for overhauls (24,464) (41,984)Capitalized overhauls (33,779) (29,340)Rentals received in advance (56,775) (50,995)Straight line rents 23,306 26,412Derivatives 3,781 3,793Other comprehensive income 2,930 (74,642)Other (13,028) (492)

$2,562,568 $2,250,314

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Note I — Income Taxes (Continued)

A reconciliation of the computed expected total provision for income taxes to the amount recorded is as follows:

(a) Includes realized foreign tax credits in 2003 and realized Canadian tax credits in 2001 for taxes paid in prior years.

During 2002, the Company settled an open audit issue with the Internal Revenue Service which required the Company to capitalize for tax purposes certain overhaul reimbursements made between 1991 and 2001. The adjustment had no impact on the total provision but required the Company to establish a current tax liability and a corresponding deferred tax asset of $25,663 in 2002. Such amount is reflected in the Company’s 2002 current and deferred provision.

Federal tax benefits provided by the Extraterritorial Income Exclusion (“ETI”) and the Foreign Sales Corporation (“FSC”) may not be available in 2004. The World Trade Organization has ruled that these are unfair export subsidies, and the European Union has begun to impose trade sanctions as a result of these subsidies not being repealed by the United States. The United States has proposed legislation to repeal the ETI and FSC export benefits and possibly provide other tax benefits to domestic corporations. The effect this proposed legislation will have on the Company will not be determinable until the legislation is finalized.

2003 2002 2001Computed expected provision based upon a federal rate of 35% $262,594 $277,656 $263,802State income taxes, net of Federal income taxes 3,574 4,101 816Foreign sales corporation and extraterritorial income benef (29,598) (18,517) (6,590)Foreign taxes(a) -1,242 2,564 -6,080Other 33 -1,025 -129

$235,361 $264,779 $251,819

ABC Corporation

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XYZ CorporationNote 15 — Income Taxes

The effective tax rate varied from the statutory federal corporate income tax rate as follows:

Year Ended December 31,

2003

Three Months Ended December

31, 2002

Year Ended September 30,

2002

June 2 through September 30,

2001

January 1 through June,

2001(successor) (successor) (successor) (successor) (predecessor)

Federal income tax rate 35.0% 35.0% 35.0% 35.0% 35.0%Increase (decrease) due to:

State and local income taxes, net of federal income tax benefit. 3.7 2.6 (0.3) 2.2 2.2

Foreign income taxes 1.0 1.6 (0.4) 2.2 2.2Goodwill impairment — — (36.1) — —Interest expense — TCH — — (4.2) — —Goodwill amortization — — — 6.2 7.8Other (0.7) (0.2) 0.1 0.2 2.6Effective tax rate 39.0% 39.0% -5.9% 45.8% 49.8%

Percentage of Pretax Income

The provision for income taxes is comprised of the following ($ in millions):

Year Ended December 31,

2003

Three Months Ended December

31, 2002

Year Ended September 30, 2002

June 2 through September 30,

2001

January 1 through June,

2001(successor) (successor) (successor) (successor) (predecessor)

Current Federal income tax provision $ - $ - $ - $ - $ -Deferred Federal income tax provision 265.1 71.9 276.9 113.6 63.7Total Federal income taxes 265.1 71.9 276.9 113.6 63.7State and local income taxes 53.5 9.4 30.4 11.7 5.7Interest expense — TCH — — (4.2) — —Foreign income taxes 46.4 10.7 66.7 32.1 15.4

Total provision for income taxes $365.0 $92.0 $374.0 $157.4 $84.8

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The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities are presented below ($ in millions).

December 31, 2003 December 31, 2002 September 30, 2002(successor) (successor) (successor)

Assets:Net operating loss carryforwards $834.1 $849.9 $834.4Provision for credit losses 202.4 254.8 282.1Alternative minimum tax credits 142 142 142.0Purchase price adjustments 67.9 176.9 207.7Goodwill 65.6 91.5 98.4Other comprehensive income items 47.6 84.3 86.0Accrued liabilities and reserves 43.8 46.5 59.9Other 14.1 — —

Total deferred tax assets 1,417.5 1,645.9 1,710.5Liabilities:Leasing transactions (1,311.7) (1,189.6) (1,215.6)Securitization transactions (633.0) (614.4) (590.0)Market discount income — (1.4) (1.5)

Total deferred tax liabilities (1,944.7) (185.4) (1,807.1)Net deferred tax (liability) ($527.2) ($159.5) ($96.6)

Percentage of Pretax Income

The presentation of deferred tax assets and liabilities in prior years has been modified to reflect amountsincluded on completed and amended income tax returns. At December 31, 2003, the Company was continuing to develop an analysis ofdeferred tax assets and liabilities. Future income tax return filings and the completion of the aforementioned analysis of deferred tax assets and liabilities could result in reclassifications to the deferred tax assets and liabilities shown in the preceding table.

At December 31, 2003, the Company had U.S. federal net operating losses of approximately $1,937.7 million, whichexpire in various years beginning in 2011. In addition, the Company has various state net operating losses that will expire in various years beginning in 2004. Federal and state operating losses may be subject to annual use limitations under section 382 of the Internal Revenue Code of 1986, as amended, and other limitations under certain state laws. Management believes that the Company will have sufficient taxable income in future years and can avail itself of tax planning strategies in order to fully utilize these losses. Accordingly, the Company does not believe a valuation allowance is required with respect to these net operating losses.

XYZ Corporation

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Recent DevelopmentsRecent Developments

During July 2004, as part of the FASB project to harmonize US During July 2004, as part of the FASB project to harmonize US GAAP with International accounting standards, the following GAAP with International accounting standards, the following exceptions to recording deferred taxes are being reviewed and maexceptions to recording deferred taxes are being reviewed and may y be eliminated:be eliminated:

–– Foreign subsidiaries or joint ventures that are permanent in natForeign subsidiaries or joint ventures that are permanent in natureure–– Intercomany asset transfersIntercomany asset transfers–– Certain foreign currency adjustmentsCertain foreign currency adjustments

If any changes are proposed, an exposure draft is not expected If any changes are proposed, an exposure draft is not expected until late 2004 or early 2005.until late 2004 or early 2005.

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Income Tax Accounting Bosco Moose · PDF fileIncome Tax Accounting and Reporting. ... alternative minimum tax credit carryforwards (FAS 109 ¶ 19) ... Net Operating Loss