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Income Taxes
We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities
and amounts reported in our Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards.
We follow very specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets
recorded in our Consolidated Balance Sheets and provide valuation allowances as required. We regularly review
our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the
expected timing of the reversals of existing temporary differences and tax planning strategies. Adjustments to our
valuation allowance, through charges (credits) to income tax expense, were $2 million, $(9) million and $(5) million
for the years ended December 31, 2013, 2012 and 2011, respectively. There were other decreases to our valuation
allowance, including the effects of currency, of $42 million, $14 million and $53 million for the years ended
December 31, 2013, 2012 and 2011, respectively. These did not affect income tax expense in total as there was a
corresponding adjustment to deferred tax assets or other comprehensive income. Gross deferred tax assets of $3.4
billion and $3.8 billion had valuation allowances of $614 million and $654 million at December 31, 2013 and 2012,
respectively.
We are subject to ongoing tax examinations and assessments in various jurisdictions. Accordingly, we may incur
additional tax expense based upon our assessment of the more-likely-than-not outcomes of such matters. In
addition, when applicable, we adjust the previously recorded tax expense to reflect examination results. Our
ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require
judgment and can materially increase or decrease our effective tax rate, as well as impact our operating results.
Unrecognized tax benefits were $267 million, $201 million and $225 million at December 31, 2013, 2012 and 2011,
respectively.
Refer to Note 16 - Income and Other Taxes in the Consolidated Financial Statements for additional information
regarding deferred income taxes and unrecognized tax benefits.
Business Combinations and Goodwill
The application of the purchase method of accounting for business combinations requires the use of significant
estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order
to properly allocate purchase price consideration between assets that are depreciated and amortized from goodwill.
Our estimates of the fair values of assets and liabilities acquired are based upon assumptions believed to be
reasonable, and when appropriate, include assistance from independent third-party valuation firms. Refer to Note 3
- Acquisitions and Divestitures in the Consolidated Financial Statements for additional information regarding the
allocation of the purchase price consideration for our acquisitions.
As a result of our acquisition of ACS, as well as other acquisitions including GIS, we have a significant amount of
goodwill. Goodwill at December 31, 2013 was $9.2 billion. Goodwill is not amortized but rather is tested for
impairment annually or more frequently if an event or circumstance indicates that an impairment may have been
incurred. Events or circumstances that might indicate an interim evaluation is warranted include, among other
things, unexpected adverse business conditions, macro and reporting unit specific economic factors, supply costs,
unanticipated competitive activities and acts by governments and courts.
Application of the annual goodwill impairment test requires judgment, including the identification of reporting units,
assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and the assessment
- qualitatively or quantitatively - of the fair value of each reporting unit against its carrying value. At December 31,
2013, $6.8 billion and $2.4 billion of goodwill was allocated to reporting units within our Services and Document
Technology segments, respectively. Our Services segment is comprised of four reporting units while our Document
Technology segment is comprised of one reporting unit for a total of five reporting units with goodwill balances.
Our annual impairment test of goodwill was performed in the fourth quarter of 2013. Consistent with 2012, we
elected to utilize a quantitative assessment of the recoverability of our goodwill balances for each of our reporting
units.
In our quantitative test, we estimate the fair value of each reporting unit by weighting the results from the income
approach (discounted cash flow methodology) and market approach. These valuation approaches require
significant judgment and consider a number of factors that include, but are not limited to, expected future cash
flows, growth rates and discount rates, and comparable multiples from publicly traded companies in our industry
and require us to make certain assumptions and estimates regarding the current economic environment, industry
factors and the future profitability of our businesses.
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