Presenting a live 110 ‐ minute teleconference with interactive Q&A ASC 740 and Valuations of Deferred Tax Assets ASC 740 and Valuations of Deferred Tax Assets Tackling Tough Valuation and Disclosure Challenges and Recovering Prior Allowances WEDNES DAY, MAY 2, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Douglas S g ayuk, Partner, Clifton Douglas , S y , , g , an Jose, Calif. , Mathew DeMong, Tax Engagement S enior Manager, BDO USA , Boston For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10 .
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ASC ASC 740 and Valuations of Deferred Tax d V l ti f D f d T Assets Seminar May 2, 2012 Douglas S ayuk, Clifton Douglas Mathew DeMong, BDO US A doug@ cliftondouglas.com mdemong@ bdo.com
Today’s Program Overview Of Material Terms Of AS C 740 And Other Guidance S lide 7 – S lide 12 [Douglas S ayuk] Tax-Related Issues S lide 13 – S lide 52 [Mat hew DeMong] Valuation Issues Arising With Deferred Tax Assets S lide 53– S lide 79 [Douglas S ayuk]
Douglas Sayuk, Clifton Douglas OVERVIEW OF MATERIAL OVERVIEW OF MATERIAL TERMS OF ASC 740 AND OTHER GUIDANCE
Introduction: DTA Build From Recession From Recession _____________________________________________________ RECESSION RECESSION = TAX LOSSES = DTA BUILD DTA BUILD 8
Introduction: DTA Build From Recession (Cont.) Recession (Cont.) _____________________________________________________ DATE DOW EVENT Oct. 9, 2007 14,164 Dow Hits All Time High July 2, 2008 11,215 Dow Closes >20% Below 10/07 High M March 9, 2009 h 9 2009 6,547 6 547 D Dow Closes at Post 1997 Low – 53.8% Cl t P t 1997 L 53 8% Below 10/07 High Jan. 4, 2010 10,584 Dow Recovery Under Way But Slow Source: 1) Dow Jones - Monthly Bar Chart - Semi-log Scale - 1971-2012 2) DowJonesClose.com – Dow Jones Industrial Average Closing Prices 9
Introduction: DTA Utilization From Economic Recovery From Economic Recovery _____________________________________________________ IMPROVING ECONOMY IMPROVING ECONOMY = 2011/2012 DTA UTILIZATION/POTENTIAL VA RELEASE RELEASE 10
Introduction: Increased DTA Accounting F From Business Combinations B i C bi ti _____________________________________________________ Improving Economy Improving Economy = Increasing Business Combinations Combinations = Increasing Tax Accounting Under ASC 805 10 5 (FAS 141R) ASC 805-10-5 (FAS 141R) 11
Introduction: Basic Terminology Introduction: Basic Terminology _____________________________________________________ • ASC Topic 740 (previously FAS 109): Accounting for Income Taxes • ASC Topic 740-10, et seq. (previously FIN 48): Accounting for Uncertainty in Income Taxes • Deferred tax asset (DTA): Cumulative deductible temporary difference ( ) y • Deferred tax liability (DTL): Cumulative taxable temporary difference • Valuation allowance (VA): A contra- or reduction account to deferred tax assets, which represents that portion of total deferred tax assets that the firm judges is unlikely to be realized. • Tax attribute: A type of loss or credit that may reduce taxable income or • Tax attribute: A type of loss or credit that may reduce taxable income or tax liability, respectively (e.g., net operating loss or research credit). • More likely than not (MLTN): A likelihood of greater than 50% 12
Mathew DeMong, BDO USA TAX RELATED ISSUES TAX ‐ RELATED ISSUES
Agenda For This Section Tax-related issues A. Effective tax rates and interim accounting for taxes B. Business combinations and accounting for taxes C. Tax accounting for stock-based compensation BDO US A, LLP, a Delaware limited liability partnership, is the U.S . member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.
Overview Of Interim Overview Of Interim (Quarterly) Reporting Interim reports are for a period less than one year Interim reports are for a period less than one year. An estimated effective tax rate for the year is used to determine income tax expense for interim periods. t f i t i i d The complexity of the estimated annual effective tax rate calculation will depend upon: - The number of tax j urisdictions in which the company operates - The nature and extent of the “ permanent difference” items p Do not include the tax related to “ significant unusual or extraordinary items” in estimated annual effective tax rate. items in estimated annual effective tax rate. AS C 740 and Valuations of Deferred Tax Assets Page 15
Estimated Annual Effective Tax Rate Estimated Annual Effective Tax Rate Total tax expense for the year results from separate calculations of Total tax expense for the year results from separate calculations of current tax expense and deferred tax expense. Estimates of both current and deferred tax expense attributed to E ti t f b th t d d f d t tt ib t d t “ ordinary income” will be required, to calculate the estimated annual effective tax rate for the year. The rate is the ratio of estimated annual income tax expense to estimated pre-tax ordinary income. AS C 740 and Valuations of Deferred Tax Assets Page 16
Discrete Items Discrete Items Tax expense/ benefit related to “ ordinary” income shall be computed at the Tax expense/ benefit related to ordinary income shall be computed at the estimated annual effective tax rate (EAETR), and the tax expense/ benefit related to all other items shall be individually computed and recognized when the items occur (FIN 18 Par 6) when the items occur (FIN 18, Par. 6). —S ignificant or unusual items that will be separately reported or reported net of their related tax effect reported net of their related tax effect —Effects of change in j udgment related to beginning of the year valuation allowances or liabilities for tax exposure items (FIN 48 liabilities) liabilities) —Effects of changes in tax laws or rates —Provision to return adj ustments AS C 740 and Valuations of Deferred Tax Assets Page 17
Computing Income Tax Provisions Computing Income Tax Provisions In Interim Periods Compute year-to-date income tax expense/ benefit —Estimated annual effective tax rate (EAETR) —Multiply EAETR by year-to-date ordinary income (loss) at end of the period —Add tax expense/ benefit related to discrete items and other exceptions to the general rules AS C 740 and Valuations of Deferred Tax Assets Page 18
Example 1 Example 1 If a company estimates its annual income to be $250,000 and estimates an R&D credit of $15,000, what is its effective rate if the company computes its taxes at a 34% rate? The effective tax rate would be 28% , computed in the following manner: - Gross taxes would be $85,000 ($250,000 x 34% G ld b $85 000 ($250 000 34% ) ) - Net taxes would be $70,000 ($85,000 gross tax - $15,000 R&D credit - ETR would be 28% ($70,000 net taxes/ $250,000 annual income) What would the income tax provision for the first quarter be if there was $50,000 of income in the first quarter? of income in the first quarter? The income tax provision for the first quarter would be $50,000 x 28% = $14,000. AS C 740 and Valuations of Deferred Tax Assets Page 19
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