Discover 2014 Annual Report Download - page 149

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Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such
differences are expected to reverse. Valuation allowances are provided to reduce deferred tax assets to an amount that
is more likely than not to be realized. The Company evaluates the likelihood of realizing its deferred tax assets by
estimating sources of future taxable income and the impact of tax planning strategies. Significant components of the
Company’s net deferred income taxes, which are included in other assets in the consolidated statements of financial
condition, were as follows (dollars in millions):
December 31,
2014 2013
Deferred tax assets:
Allowance for loan losses ........................................................................................................................... $ 659 $ 627
Customer fees and rewards ........................................................................................................................ 212 212
Compensation and benefits ........................................................................................................................ 123 87
State income taxes .................................................................................................................................... 75 65
Other ....................................................................................................................................................... 77 72
Total deferred tax assets before valuation allowance ................................................................................. 1,146 1,063
Valuation allowance .................................................................................................................................. (41)(37)
Total deferred tax assets, net of valuation allowance ................................................................................. 1,105 1,026
Deferred tax liabilities:
Debt exchange premium ............................................................................................................................ (91)(98)
Depreciation and software amortization ...................................................................................................... (116) (83)
Unearned income ...................................................................................................................................... (31)(40)
Intangibles ................................................................................................................................................ (15)(22)
Deferred loan acquisition costs ................................................................................................................... (23)(16)
Partnership investments .............................................................................................................................. (19) —
Other ....................................................................................................................................................... (6) (13)
Total deferred tax liabilities .................................................................................................................... (301) (272)
Net deferred tax assets ....................................................................................................................... $ 804 $ 754
Deferred taxes at December 31, 2014 included a valuation allowance of $41 million established primarily on
Diners Club Italy deferred taxes.
A reconciliation of beginning and ending unrecognized tax benefits is as follows (dollars in millions):
For the Calendar Years Ended
December 31, For the Fiscal
Year Ended
November 30,
2012
For the One
Month Ended
December 31,
2012
2014 2013
Balance at beginning of period ................................................................ $ 629 $ 575 $ 507 $ 573
Additions:
Current year tax positions .................................................................... 18 1 74 2
Prior year tax positions ........................................................................ 74 142 1 —
Reductions:
Prior year tax positions ........................................................................ (80) (69) (5) —
Settlements with taxing authorities ........................................................ (4) (18) (2) —
Expired statute of limitations ................................................................. (2) (2) (2) —
Balance at end of period(1) ....................................................................... $ 635 $ 629 $ 573 $ 575
(1) As of the calendar years ended December 31, 2014 and 2013, fiscal year ended November 30, 2012, and one month ended December 31, 2012, amounts
included $144 million, $142 million, $108 million and $109 million respectively, of unrecognized tax benefits, which, if recognized, would favorably affect the
effective tax rate.