Kodak 2007 Annual Report Download - page 73

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Accounting for Uncertainty in Income Taxes (“FIN 48”)
The Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), on January 1, 2007. As a result of the imple-
mentation of FIN 48, there was no cumulative effect adjustment for unrecognized tax benefits, which would have been accounted for as an adjustment to
the January 1, 2007 balance of retained earnings.
The following is a rollforward of the Company’s liability for income taxes associated with unrecognized tax benefits:
(in millions)
Balance as of January 1, 2007 $ 305
Tax positions related to current year:
Additions 59
Reductions —
Tax positions related to prior years:
Additions 45
Reductions (101)
Settlements (4)
Lapses in statutes of limitations (1)
Balance as of December 31, 2007 $ 303
The Company’s policy regarding interest and/or penalties related to income tax matters is to recognize such items as a component of income tax expense
(benefit). During the years ended December 31, 2007, 2006 and 2005, the Company recognized approximately $10 million, $15 million, and $19 million,
respectively, in interest expense. Additionally, the Company had approximately $51 million and $58 million of interest and penalties associated with uncer-
tain tax benefits accrued as of December 31, 2007 and 2006, respectively.
If the unrecognized tax benefits were recognized, they would favorably affect the effective income tax rate in any future periods. Consistent with the
provisions of FIN 48, the Company has classified certain income tax liabilities as current or noncurrent based on management’s estimate of when these
liabilities will be settled and has reclassified these items in the Consolidated Statement of Financial Position as of December 31, 2006 to conform to the
current period presentation. These noncurrent income tax liabilities are recorded in Other long-term liabilities in the Consolidated Statement of Financial
Position. Current liabilities are recorded in Accrued income and other taxes in the Consolidated Statement of Financial Position.
It is reasonably possible that the liability associated with the Company’s unrecognized tax benefits will increase or decrease within the next twelve months.
These changes may be the result of ongoing audits or the expiration of statutes of limitations. Settlements could increase earnings in an amount ranging
from $0 to $60 million based on current estimates. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although
management believes that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could
have an adverse effect on the earnings of the Company. Conversely, if these issues are resolved favorably in the future, the related provision would be
reduced, thus having a positive impact on earnings. Due to the uncertainty of amounts and in accordance with its accounting policies, the Company has
not recorded any potential impact of these settlements.
The Company files numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions.
The Company has substantially concluded all U.S. federal income tax matters for years through 2000. The Company’s U.S. tax matters for the years 2001
through 2006 remain subject to examination by the Internal Revenue Service (IRS). Substantially all material state, local, and foreign income tax matters
have been concluded for years through 1998. The Company tax matters for the year 1999 through 2006 remain subject to examination by the respective
state, local, and foreign tax jurisdiction authorities.
As previously reported, on October 3, 2006, the Company filed a claim for a federal tax refund related to a 1994 loss recognized on the sale of a
subsidiary’s stock that was disallowed at that time under IRS regulations. Since that time, the IRS has issued new regulations that serve as the basis
for this refund claim. As of December 31, 2007, the claim had been brought to the Joint Committee on Taxation and is pending further review. Based on
information available at this time, and in accordance with FIN 48, the Company has not recorded a tax benefit due to the uncertainty of the resolution.
During 2007, the Company has continued to be audited by various taxing authorities. The Company reached a settlement with the IRS covering tax years
1999-2000. As a result, the Company recognized a tax benefit from continuing operations in the United States of $17 million, including interest. Also during
2007, the Company reached a settlement with the taxing authorities in two locations outside of the U.S. resulting in a tax benefit of $76 million. No other
material settlements were reached during 2007 or 2006.