IBM 2008 Annual Report Download - page 102

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Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION and Subsidiary Companies
Management Discussion ............................................................................................. 18
Consolidated Statements ............................................................................................ 60
Notes ............................................................................................................................... 66
A – E ........................................................................................................................66
F – J ........................................................................................................................86
K– Q .......................................................................................................................88
K. BORROWINGS ................................................................................................. 88
L. DERIVATIVES AND HEDGING TRANSACTIONS ................................................90
M. OTHER LIABILITIES ..........................................................................................94
N. STOCKHOLDERS’ EQUITY ACTIVITY ...............................................................95
O. CONTINGENCIES AND COMMITMENTS ..........................................................97
P. TAXES ...............................................................................................................99
Q. RESEARCH, DEVELOPMENT AND ENGINEERING ........................................ 101
R –W ..................................................................................................................... 10 2
The components of the continuing operations provision for income
taxes by taxing jurisdiction are as follows:
($  )
For the year ended December : 2008 2007 2006
U.S. federal:
Current $ 338 $1,085 $ 602
Deferred 1,263 683 1,326
1,601 1,768 1,928
U.S. state and local:
Current 216 141 11
Deferred 205 (19) 198
421 122 209
Non-U.S.:
Current 1,927 2,105 1,564
Deferred 432 76 200
2,359 2,181 1,764
Total continuing operations
provision for income taxes 4,381 4,071 3,901
Provision for social security,
real estate, personal property
and other taxes 4,076 3,832 3,461
TOTAL TAXES INCLUDED IN INCOME
FROM CONTINUING OPERATIONS $8,457 $7,903 $7,362
A reconciliation of the statutory U.S. federal tax rate to the company’s
continuing operations effective tax rate is as follows:
For the year ended December : 2008 2007 2006
Statutory rate 35% 35% 35%
Foreign tax differential (8) (6) (5)
State and local 11 1
Other (2) (2) (2)
EFFECTIVE RATE 26% 28% 29%
During the second quarter of , the company reached agreement
with the Internal Revenue Service (IRS) regarding claims for certain
tax incentives. The resolution of this matter resulted in a net tax
benefit of $ million. Also, during the second quarter, the company
completed its analysis with respect to certain issues associated with
newly published U.S. tax regulations. The review resulted in a tax
benefit of $ million. The above benefits were predominately offset
by the second-quarter  tax cost associated with the intercompany
transfer of certain intellectual property during the quarter.
During the fourth quarter of , the IRS concluded its examina-
tion of the company’s income tax returns for  and  and issued
a final Revenue Agent’s Report (RAR). The company has agreed with
all of the adjustments contained in the RAR, with the exception of a
proposed adjustment, with a pre-tax amount in excess of $ billion,
relating to valuation matters associated with the intercompany trans-
fer of certain intellectual property in  and computational issues
related to certain tax credits. The company disagrees with the IRS on
these specific matters and intends to contest the proposed adjustments
through the IRS appeals process and the courts, if necessary. The
company has redetermined its unrecognized tax benefits, including
all similar items during open tax years, based on the agreed and dis-
puted adjustments contained in the RAR and associated information
and analysis. As a result, the company has recorded a net increase in
tax reserves and an associated charge to the provision for income
taxes of $ million.
In addition, in , the company’s effective tax rate also benefited
from a net increase in the utilization of foreign tax credits.
The significant components of deferred tax assets and liabilities
that are recorded in the Consolidated Statement of Financial Position
were as follows:
  
($  )
At December : 2008 2007*
Retirement-related benefits $ 5,215 $ 2,505
Stock-based and other compensation 2,579 2,920
Federal/State tax loss/state credit carryforwards 862 781
Capitalized research and development
795 1,050
Foreign tax loss/credit carryforwards
642 498
Deferred income 739 645
Bad debt, inventory and warranty reserves 561 647
Other 2,061 1,962
Gross deferred tax assets 13,454 11,008
Less: valuation allowance 720 772
NET DEFERRED TAX ASSETS $12,734 $10,236
* Reclassified to conform with 2008 presentation.
  
($  )
At December : 2008 2007*
Leases $1,913 $1,635
Depreciation 941 478
Software development costs 449 462
Retirement-related benefits 104 4,964
Other 1,059 856
GROSS DEFERRED TAX LIABILITIES $4,466 $8,395
* Reclassified to conform with 2008 presentation.