Archer Daniels Midland 2010 Annual Report Download - page 74

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Archer Daniels Midland Company
Notes to Consolidated Financial Statements (Continued)
Note 12.
Income Taxes (Continued)
The Company accounts for its income tax positions under the provisions of ASC Topic 740, Income Taxes. ASC
Topic 740 prescribes a minimum threshold a tax position is required to meet before being recognized in the
consolidated financial statements. This interpretation requires the Company to recognize in the consolidated
financial statements tax positions determined more likely than not to be sustained upon examination, based on the
technical merits of the position. The total amounts of unrecognized tax benefits at June 30, 2010 and 2009 are as
follows:
Unrecognized Tax Benefits
2010
2009
(in millions)
Beginning balance
$ 54
$ 55
Additions related to current years‘ tax positions
31
–
Additions related to prior years‘ tax positions
8
10
Reductions related to prior years‘ tax positions
(7)
(9)
Settlements with tax authorities
(2)
(2)
Ending balance
$ 84
$ 54
The additions and reductions in unrecognized tax benefits shown in the table include effects related to net income
and shareholders‘ equity, and timing differences for which the ultimate deductibility is highly certain but for which
there is uncertainty about the timing of such deductibility. The 2010 changes in unrecognized tax benefits did not
have a material effect on the Company‘s net income or cash flow.
The Company classifies interest on income tax related balances as interest expense or interest income and
classifies tax-related penalties as selling, general and administrative expenses. At June 30, 2010 and 2009, the
Company had accrued interest and penalties on unrecognized tax benefits of $27 million and $22 million,
respectively.
The Company is subject to income taxation in many jurisdictions around the world. Resolution of the related tax
positions through negotiations with relevant tax authorities or through litigation may take years to complete.
Therefore, it is difficult to predict the timing for resolution of tax positions. However, the Company does not
anticipate that the total amount of unrecognized tax benefits will increase or decrease significantly in the next
twelve months. Given the long periods of time involved in resolving tax positions, the Company does not expect
that the recognition of unrecognized tax benefits will have a material impact on the Company‘s effective income
tax rate in any given period. If the total amount of unrecognized tax benefits were required to be recognized by
the Company at one time, there would be a positive impact of $53 million on the tax expense for that period.
In December 2009, the Company‘s wholly-owned subsidiary, ADM do Brasil Ltda. (―ADM do Brasil‖), received a
tax assessment in the amount of $456 million (subject to variation in currency exchange rates) consisting of tax,
penalty, and interest, from the Brazilian Federal Revenue Service (―BFRS‖) challenging the tax deductibility of
commodity hedging losses incurred by ADM do Brasil in 2004. Commodity hedging transactions can result in
gains, which are included in ADM do Brasil‘s calculations of taxable income in Brazil, and losses, which ADM do
Brasil deducts from its taxable income in Brazil. In June 2010, ADM do Brasil was notified by the BFRS that tax
years 2005, 2006, and 2007 would also be audited, but as yet, no additional assessments have been received for
these years. If the BFRS were to challenge commodity hedging deductions in all tax years still open to assessment
(2005-2010), the Company estimates it could receive additional claims of approximately $160 million (as of June
30, 2010 and subject to variation in currency exchange rates).