Dominion Power 2007 Annual Report Download - page 72

Notes to Consolidated Financial Statements, Continued
Income Taxes
We file a consolidated federal income tax return for Dominion
and its subsidiaries. In addition, where applicable, we file com-
bined income tax returns for Dominion and its subsidiaries in
various states; otherwise, we file separate state income tax returns
for our subsidiaries. We also filed federal and provincial income
tax returns for certain former subsidiaries in Canada.
SFAS No. 109, Accounting for Income Taxes (SFAS No. 109),
requires an asset and liability approach to accounting for income
taxes. Deferred income tax assets and liabilities are provided,
representing future effects on income taxes for temporary differ-
ences between the bases of assets and liabilities for financial
reporting and tax purposes. Where permitted by regulatory
authorities, the treatment of temporary differences may differ
from the requirements of SFAS No. 109. Accordingly, a regu-
latory asset is recognized if it is probable that future revenues will
be provided for the payment of deferred tax liabilities. We estab-
lish a valuation allowance when it is more likely than not that all,
or a portion, of a deferred tax asset will not be realized.
Effective January 1, 2007, we adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). In
our financial statements, we recognize positions taken, or
expected to be taken, in income tax returns that are more-likely-
than-not to be realized, assuming that the position will be exam-
ined by tax authorities with full knowledge of all relevant
information.
If we conclude that it is more-likely-than-not that a tax posi-
tion, or some portion thereof, will not be sustained, the related
tax benefits are not recognized in the financial statements. For the
majority of our unrecognized tax benefits, the ultimate deducti-
bility is highly certain, but there is uncertainty about the timing
of such deductibility. Unrecognized tax benefits also include
amounts for which uncertainty exists as to whether such amounts
are deductible as ordinary deductions or capital losses. Unrecog-
nized tax benefits may result in an increase in income taxes pay-
able, a reduction of an income tax refund receivable, an increase
in deferred tax liabilities, or a decrease in deferred tax assets. Also,
when uncertainty about the deductibility of an amount is limited
to the timing of such deductibility, the increase in taxes payable
(or reduction in tax refund receivable) is accompanied by a
decrease in deferred tax liabilities. Noncurrent income taxes pay-
able related to unrecognized tax benefits are classified in other
deferred credits and other liabilities; current payables are included
in accrued interest, payroll and taxes, except when such amounts
are presented net with amounts receivable from or amounts pre-
paid to tax authorities in prepayments.
Prior to the adoption of FIN 48, we established liabilities for
tax-related contingencies when the incurrence of the liability was
determined to be probable and the amount could be reasonably
estimated in accordance with SFAS No. 5, Accounting for Con-
tingencies, and subsequently reviewed them in light of changing
facts and circumstances.
We recognize changes in estimated interest payable on net
underpayments and overpayments of income taxes in interest
expense and estimated penalties that may result from the settle-
ment of some uncertain tax positions in other income. In our
Consolidated Statements of Income for 2007, 2006 and 2005, we
recognized a $19 million reduction in interest expense and no
penalties, $2 million of interest expense and no penalties and a $9
million reduction in interest expense and no penalties,
respectively. At December 31, 2007 and 2006, respectively, we
had accrued $9 million and $10 million for the payment of inter-
est and penalties.
Deferred investment tax credits are amortized over the service
lives of the properties giving rise to the credits.
Stock-based Compensation
Effective January 1, 2006, we measure and recognize compensa-
tion expense in accordance with SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123R), which requires that
compensation expense relating to share-based payment trans-
actions be recognized in the financial statements based on the fair
value of the equity or liability instruments issued. We adopted
SFAS No. 123R using the modified prospective application tran-
sition method. Under this transition method, compensation cost
is recognized (a) based on the requirements of SFAS No. 123R
for all share-based awards granted subsequent to January 1, 2006
and (b) based on the original provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, for all awards granted
prior to January 1, 2006, but not vested as of that date.
Prior to January 1, 2006, we accounted for our stock-based
compensation plans under the measurement and recognition
provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Under this method, stock option awards generally
did not result in compensation expense, since their exercise price
was typically equal to the market price of our common stock on
the date of grant. Accordingly, stock-based compensation expense
was included as a pro forma disclosure in the footnotes to our
financial statements.
The following table illustrates the pro forma effect on net
income and earnings per share (EPS), if we had applied the fair
value recognition provisions of SFAS No. 123 to stock-based
employee compensation:
Year Ended December 31, 2005
(millions, except per share amounts)
Net income—as reported $1,033
Add: actual stock-based compensation expense, net of tax(1) 15
Deduct: pro forma stock-based compensation expense, net of
tax (16)
Net income—pro forma $1,032
Basic EPS—as reported $ 1.51
Basic EPS—pro forma 1.51
Diluted EPS—as reported 1.50
Diluted EPS—pro forma 1.50
(1) Actual stock-based compensation expense primarily relates to restricted
stock.
Prior to the adoption of SFAS No. 123R, we presented the
benefits of tax deductions resulting from the exercise of stock-
based compensation as an operating cash flow in our Con-
solidated Statements of Cash Flows. SFAS No. 123R requires the
benefits of tax deductions in excess of the compensation cost
recognized for stock-based compensation (excess tax benefits) to
be classified as a financing cash flow. In accordance with FASB
Staff Position No. FAS 123(R)-3, Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards,we
have elected to use the simplified method to determine the impact
70 Dominion 2007 Annual Report