Aflac 2006 Annual Report Download - page 68

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Income tax expense in the accompanying statements of
earnings varies from the amount computed by applying the
expected U.S. tax rate of 35% to pretax earnings. The principal
reasons for the differences and the related tax effects for the
years ended December 31 were as follows:
(In millions) 2006 2005 2004
Income taxes based on U.S. statutory rates $ 792 $ 779 $ 632
Utilization of foreign tax credit carryforwards (21) (20) (18)
Release of valuation allowance on deferred tax assets –(34) (128)
Nondeductible expenses 10 10 6
Other, net –815
Income tax expense $ 781 $ 743 $ 507
Total income tax expense for the years ended December 31,
was allocated as follows:
(In millions) 2006 2005 2004
Statements of earnings $ 781 $ 743 $ 507
Other comprehensive income:
Changes in unrealized foreign currency
translation gains/losses 10 188 (32)
Pension liability adjustment (22) (2) 5
Unrealized gains on investment securities:
Unrealized holding gains (losses)
arising during the year (226) (206) 61
Reclassification adjustment for realized
(gains) losses included in net earnings (28) (95) (6)
Total income tax expense (benefit) allocated
to other comprehensive income (266) (115) 28
Additional paid-in capital (exercise of stock options) (18) (37) (1)
Total income taxes $ 497 $ 591 $ 534
Changes in unrealized foreign currency translation
gains/losses included deferred income tax expense of $11
million in 2006, compared with deferred income tax expense
of $122 million in 2005 and deferred income tax benefit of
$31 million in 2004.
The income tax effects of the temporary differences that
gave rise to deferred income tax assets and liabilities as of
December 31 were as follows:
(In millions) 2006 2005
Deferred income tax liabilities:
Deferred policy acquisition costs $ 1,680 $ 1,576
Unrealized gains on investment securities 596 876
Difference in tax basis of investment in Aflac Japan 25 311
Other basis differences in investment securities 314 132
Premiums receivable 135 128
Policy benefit reserves 388 248
Other 154 1
Total deferred income tax liabilities 3,292 3,272
Deferred income tax assets:
Depreciation 92 99
Policyholder protection fund obligation 66 66
Unfunded retirement benefits 45 45
Other accrued expenses 55 52
Tax credit carryforwards 80 235
Policy and contract claims 61 93
Unrealized exchange loss on yen-denominated notes payable 35 33
Capital loss carryforwards –21
Deferred compensation 81 51
Other 494 349
Total deferred income tax assets 1,009 1,044
Net deferred income tax liability 2,283 2,228
Current income tax liability 179 349
Total income tax liability $ 2,462 $ 2,577
A valuation allowance is provided when it is more likely than
not that deferred tax assets will not be realized. In prior years,
we established valuation allowances primarily for alternative
minimum tax credit and noninsurance loss carryforwards that
exceeded projected future offsets. Under U.S. income tax
rules, only 35% of noninsurance losses can be offset against
life insurance taxable income each year.
We received regulatory approval for a change in the allocation
of expenses under the management fee agreement between
Aflac and the Parent Company in 2005. This enabled the
Parent Company to fully utilize its tax-basis, non-life operating
losses and therefore release the valuation allowance on the
associated deferred tax assets, resulting in a benefit of $34
million ($.07 per diluted share) in 2005.
The American Jobs Creation Act of 2004 eliminated the 90%
limitation on the utilization of foreign tax credits. As a result of
this tax law change, we recognized a benefit of $128 million
($.25 per diluted share) for the release of the valuation
allowance associated with certain deferred tax assets.
During 2005, the valuation allowance for deferred tax assets
decreased by $34 million primarily due to utilization of non-
life losses. For current U.S. income tax purposes, alternative
minimum tax credit carryforwards of $80 million were
available at December 31, 2006.