Discover 2010 Annual Report Download - page 141

A reconciliation of beginning and ending unrecognized tax benefits is as follows (dollars in thousands):
For the Years Ended November 30,
2010 2009 2008
Balance at beginning of period ............................................................................................................................ $305,721 $285,619 $248,368
Additions:
Current year tax positions ................................................................................................................................ 10,016 41,943 20,270
Prior year tax positions.................................................................................................................................... 134,420 32,089 33,597
Reductions:
Prior year tax positions.................................................................................................................................... (68,843) (19,719) (12,696)
Settlements with taxing authorities ..................................................................................................................... (6,786) (32,508) (2,364)
Expired statute of limitations ............................................................................................................................. (1,273) (1,703) (1,556)
Balance at end of period(1) .................................................................................................................................. $373,255 $305,721 $285,619
(1) For the years ended November 30, 2010, 2009 and 2008, the balance at end of period included $100.2 million, $81.9 million and $65.8 million, respectively, of unrecognized tax benefits,
which, if recognized, would favorably affect the effective tax rate.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of
income tax expense. During the years ended November 30, 2010, 2009 and 2008, the Company recognized $29.8
million, $8.9 million and $13.7 million, respectively, of interest and penalties in the consolidated statement of income
related to unrecognized tax benefits. The Company has $68.3 million and $38.5 million accrued in the consolidated
statement of financial position for the payment of interest and penalties related to unrecognized tax benefits as of
November 30, 2010 and 2009, respectively. The changes primarily relate to the revaluation of existing federal and state
tax issues.
The Company is under continuous examination by the IRS and the tax authorities for various states. The tax years
under examination vary by jurisdiction; for example, the current IRS examination covers 1999 through 2005, which is in
IRS administrative appeals. The Company is being audited for tax years 2006 through June 30, 2007 (the approximate
date of our spin-off from Morgan Stanley), which commenced in November 2010. The Company regularly assesses the
likelihood of additional assessments in each of the taxing jurisdictions resulting from these and subsequent years’
examinations. As part of its audit of 1999 through 2005, the IRS has proposed additional tax assessments. In August
2010, the Company filed an appeal with the IRS to protest the proposed adjustments. The Company does not anticipate
that resolution of this matter will occur within the next twelve months as it is in the preliminary stage. Due to the
uncertainty of the outcome of the appeal, the Company is unable to determine if the total amount of unrecognized tax
benefits will significantly increase or decrease within the next twelve months. However, the Company believes that its
reserve is sufficient to cover any penalties and interest that would result in an increase in federal taxes due.
18. Earnings Per Share
Effective December 1, 2009, the Company adopted new accounting guidance on earnings per share, which clarifies
that unvested stock-based payment awards that contain nonforfeitable rights to dividends are participating securities and
should be included in computing earnings per share (“EPS”) using the two-class method. The Company grants restricted
stock units (“RSUs”) to certain employees under its stock-based compensation programs, which entitle the recipients to
receive nonforfeitable dividend equivalents in the same amount and at the same time as dividends paid to all common
stockholders; these unvested awards meet the definition of participating securities. Under the two-class method, all
earnings (distributed and undistributed) are allocated to each class of common stock and participating securities, based
on their respective rights to receive dividends. In accordance with the transition guidance, prior period EPS amounts have
been restated to conform to current period presentation, although there was no material impact on the previously
reported basic or diluted EPS.
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