Proctor and Gamble 2010 Annual Report Download - page 71

Notes to Consolidated Financial Statements The Procter & Gamble Company 69
Amounts in millions of dollars except per share amounts or as otherwise specified.
coverage. As a result of the change in taxability of the federal subsidy,
we were required to make adjustments to deferred tax asset bal-
ances, resulting in a $152 charge to income tax expense.
Tax benefits credited to shareholders’ equity totaled $5 and $556 for
the years ended June30, 2010 and 2009, respectively. These primarily
relate to the tax effects of net investment hedges, excess tax benefits
from the exercise of stock options and the impacts of certain adjust-
ments to pension and other retiree benefit obligations recorded in
shareholders’ equity.
We have undistributed earnings of foreign subsidiaries of approxi-
mately $30billion at June30, 2010, for which deferred taxes have
not been provided. Such earnings are considered indefinitely invested
in the foreign subsidiaries. If such earnings were repatriated, additional
tax expense may result, although the calculation of such additional
taxes is not practicable.
On July1, 2007, we adopted accounting guidance on the accounting
for uncertainty in income taxes. The adoption of the guidance resulted
in a decrease to retained earnings as of July1, 2007 of $232, which
was reflected as a cumulative effect of a change in accounting principle
with a corresponding increase to the net liability for uncertain tax
positions. The impact primarily reflects the accrual of additional statutory
interest and penalties as required by accounting guidance, partially
offset by adjustments to existing balances for uncertain tax positions
to comply with measurement principles. The implementation of the
guidance also resulted in a reduction in our net tax liabilities for uncer-
tain tax positions related to prior acquisitions accounted for under
purchase accounting, resulting in an $80 decrease to goodwill.
A reconciliation of the beginning and ending liability for uncertain tax
positions is as follows:
2010 2009 2008
BEGINNING OF YEAR $ 2,003 $ 2,582 $ 2,971
Increases in tax positions for prior years 128 116 164
Decreases in tax positions for prior years (146) (485) (576)
Increases in tax positions for current year 193 225 375
Settlements with taxing authorities (216) (172) (260)
Lapse in statute of limitations (45) (68) (200)
Currency translation (120) (195) 108
END OF YEAR 1,797 2,003 2,582
The Company is present in over 150 taxable jurisdictions and, at any
point in time, has 50 – 60 audits underway at various stages of
completion. We evaluate our tax positions and establish liabilities for
uncertain tax positions that may be challenged by local authorities
and may not be fully sustained, despite our belief that the underlying
tax positions are fully supportable. Uncertain tax positions are reviewed
on an ongoing basis and are adjusted in light of changing facts and
circumstances, including progress of tax audits, developments in
case law and closing of statute of limitations. Such adjustments are
reflected in the tax provision as appropriate. The Company is making
a concerted effort to bring its audit inventory to a more current
position. We have done this by working with tax authorities to con-
duct audits for several open years at once. We have tax years open
ranging from 1997 and forward. We are generally not able to reliably
estimate the ultimate settlement amounts until the close of the audit.
While we do not expect material changes, it is possible that the
amount of unrecognized benefit with respect to our uncertain tax
positions will significantly increase or decrease within the next 12
months related to the audits described above. At this time, we are
not able to make a reasonable estimate of the range of impact on the
balance of uncertain tax positions or the impact on the effective tax
rate related to these items.
Included in the total liability for uncertain tax positions at June30, 2010
is $1,318 that, depending on the ultimate resolution, could impact the
effective tax rate in future periods.
We recognize accrued interest and penalties related to uncertain tax
positions in income tax expense. As of June30, 2010 and 2009,
we had accrued interest of $622 and $636 and penalties of $89 and
$100, respectively, that are not included in the above table. During
the fiscal years ended June30, 2010 and 2009, we recognized $38
and $119 in interest and $(8) and $(4) in penalties, respectively.
Deferred income tax assets and liabilities were comprised of the
following:
June 30 2010 2009
DEFERRED TAX ASSETS
Pension and postretirement benefits $ 1,717 $ 1,395
Stock-based compensation 1,257 1,182
Loss and other carryforwards 595 439
Goodwill and other intangible assets 312 331
Accrued marketing and promotion 216 167
Fixed assets 102 114
Unrealized loss on financial and foreign
exchange transactions 88 577
Accrued interest and taxes 88 120
Advance payments 16 15
Inventory 35 97
Other 757 885
Valuation allowances (120) (104)
TOTAL 5,063 5,218
DEFERRED TAX LIABILITIES
Goodwill and other intangible assets 11,760 11,922
Fixed assets 1,642 1,654
Other 269 146
TOTAL 13,671 13,722
Net operating loss carryforwards were $1,875 and $1,428 at June30,
2010 and 2009, respectively. If unused, $567 will expire between 2011
and 2030. The remainder, totaling $1,308 at June30, 2010, may be
carried forward indefinitely.