IBM 2011 Annual Report Download - page 118

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies116
The effect of tax law changes on deferred tax assets and liabilities
did not have a material impact on the company’s effective tax rate.
The significant components of deferred tax assets and liabilities
that are recorded in the Consolidated Statement of Financial Position
were as follows:
Deferred Tax Assets
($ in millions)
At December 31: 2011 2010
Retirement benefits $ 5,169 $ 4,131
Share-based and other compensation 1,598 1,570
Domestic tax loss/credit carryforwards 914 948
Deferred income 834 1,080
Foreign tax loss/credit carryforwards 752 758
Bad debt, inventory and warranty reserves 608 564
Depreciation 474 470
Capitalized research and development 70 291
Other 1,409 1,486
Gross deferred tax assets 11,828 11,298
Less: valuation allowance 912 795
Net deferred tax assets $10,916 $10,503
Deferred Tax Liabilities
($ in millions)
At December 31: 2011 2010
Leases $2,149 $1,950
Depreciation 1,421 1,223
Goodwill and intangible assets 796 909
Retirement benefits 551 338
Software development costs 466 638
Other 1,121 1,114
Gross deferred tax liabilities $6,504 $6,172
For income tax return purposes, the company has foreign and
domestic loss carryforwards, the tax effect of which is $791 million,
as well as domestic and foreign credit carryforwards of $875 million.
Substantially all of these carryforwards are available for at least two
years or are available for 10 years or more.
The valuation allowance at December 31, 2011 principally applies
to certain foreign, state and local loss carryforwards that, in the
opinion of management, are more likely than not to expire unutilized.
However, to the extent that tax benefits related to these carryforwards
are realized in the future, the reduction in the valuation allowance
will reduce income tax expense.
The amount of unrecognized tax benefits at December 31, 2011
increased by $282 million in 2011 to $5,575 million. A reconciliation
of the beginning and ending amount of unrecognized tax benefits
is as follows:
($ in millions)
2011 2010 2009
Balance at January 1 $5,293 $4,790 $3,898
Additions based on tax positions
related to the current year 672 1,054 554
Additions for tax positions
of prior years 379 1,768 634
Reductions for tax positions
of prior years (including impacts
due to a lapse in statute) (538) (1,659) (277)
Settlements (231) (660) (19)
Balance at December 31 $5,575 $5,293 $4,790
The additions to unrecognized tax benefits related to the current
and prior years are primarily attributable to non-U.S. issues, certain
tax incentives and credits, acquisition-related matters and state
issues. The settlements and reductions to unrecognized tax benefits
for tax positions of prior years are primarily related to non-U.S. audits
and to the conclusion of the IRS examination of the company’s
income tax returns for 2004 through 2007, related to the valuation
of certain intellectual property, as well as impacts due to lapses in
statutes of limitation.
In April 2010, the company appealed the determination of a non-
U.S. taxing authority with respect to certain foreign tax losses. The
tax benefit of these losses, approximately $1,475 million, had been
included in unrecognized tax benefits within 2010 additions for tax
positions of prior years. The tax benefit of these losses total $1,557
million as of December 31, 2011. The increase was driven by currency
and has been included in the 2011 additions for tax positions of prior
years. In April 2011, the company received notification that the appeal
had been denied. In June 2011, the company filed a lawsuit chal-
lenging this decision. No final determination has been reached on
this matter.
The liability at December 31, 2011 of $5,575 million can be reduced
by $485 million of offsetting tax benefits associated with the correlative
effects of potential transfer pricing adjustments, state income taxes
and timing adjustments. The net amount of $5,090 million, if recognized,
would favorably affect the company’s effective tax rate. The net
amounts at December 31, 2010 and 2009 were $4,849 million and
$4,213 million, respectively.
Interest and penalties related to income tax liabilities are included
in income tax expense. During the year ended December 31, 2011, the
company recognized $129 million in interest expense and penalties; in
2010, the company recognized a $15 million benefit in interest expense
and penalties, and in 2009, the company recognized $193 million
in interest expense and penalties. The company has $461 million for
the payment of interest and penalties accrued at December 31, 2011
and had $374 million accrued at December 31, 2010.