Aflac 2007 Annual Report Download - page 69

65
Annual Report for 2007
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 table at
the top of the following page presents the principal reasons
for the differences and the related tax effects for the years
ended December 31.
(In millions) 2007 2006 2005
Income taxes based on U.S. statutory rates $ 875 $ 792 $ 779
Utilization of foreign tax credit carryforwards (23) (21) (20)
Release of valuation allowance on deferred tax assets –– (34)
Nondeductible expenses 11 10 10
Other, net 2–8
Income tax expense $ 865 $ 781 $ 743
Total income tax expense for the years ended December 31,
was allocated as follows:
(In millions) 2007 2006 2005
Statements of earnings $ 865 $ 781 $ 743
Other comprehensive income:
Change in unrealized foreign currency
translation gains (losses) during year (82) 10 188
Pension liability adjustment during year 53 (2)
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses)
arising during year (291) (226) (206)
Reclassification adjustment for realized
(gains) losses included in net earnings (10) (28) (95)
Total income tax expense ( benefit) allocated
to other comprehensive income (378) (241) (115)
Additional paid-in capital (exercise of stock options) (51) (18) (37)
Adoption of SFAS 158 –(25) –
Total income taxes $ 436 $ 497 $ 591
Changes in unrealized foreign currency translation gains/losses
included a deferred income tax benefit of $55 million in 2007,
compared with a deferred income tax expense of $11 million in
2006 and $122 million in 2005.
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) 2007 2006
Deferred income tax liabilities:
Deferred policy acquisition costs $ 1,847 $ 1,680
Unrealized gains on investment securities 92 596
Difference in tax basis of investment in Aflac Japan 625
Other basis differences in investment securities 528 314
Premiums receivable 143 135
Policy benefit reserves 302 131
Other 178 154
Total deferred income tax liabilities 3,103 3,035
Deferred income tax assets:
Depreciation 102 92
Policyholder protection corporation obligation 56 66
Unfunded retirement benefits 43 45
Other accrued expenses 49 55
Tax credit carryforwards –80
Policy and contract claims 76 61
Unrealized exchange loss on yen-denominated notes payable 57 35
Deferred compensation 85 81
Other 416 237
Total deferred income tax assets 884 752
Net deferred income tax liability 2,229 2,283
Current income tax liability 302 179
Total income tax liability $ 2,531 $ 2,462
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. For current U.S. income tax
purposes, there were no alternative minimum tax credit
carryforwards at December 31, 2007.
We file federal income tax returns in the United States and
Japan as well as state or prefecture income tax returns in
various jurisdictions in the two countries. U.S. federal and state
income tax returns for years before 2002 are no longer
subject to examination. We have been examined through
March 31, 2004, for Japanese tax purposes.
We adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48), on January
1, 2007 (see Note 1). There was no change in the liability for
unrecognized tax benefits as a result of the implementation of
FIN 48 and therefore no adjustment to retained earnings upon
adoption. A reconciliation of the beginning and ending amount
of unrecognized tax benefits is as follows: