International Paper 2012 Annual Report Download - page 68

the tax benefit that International Paper will receive in
its tax return for income reported by the optionees in
their individual tax returns.
At December 31, 2012 and 2011 , 9.1 million options,
and 15.6 million options, respectively, were out-
standing with exercise prices ranging from $33.74 to
$41.26 per share for 2012 and $32.54 to $43.12 per
share for 2011.
Income Taxes
International Paper records its global tax provision
based on the respective tax rules and regulations for
the jurisdictions in which it operates. Where the
Company believes that a tax position is supportable
for income tax purposes, the item is included in its
income tax returns. Where treatment of a position is
uncertain, liabilities are recorded based upon the
Company’s evaluation of the “more likely than not”
outcome considering technical merits of the position
based on specific tax regulations and facts of each
matter. Changes to recorded liabilities are only made
when an identifiable event occurs that changes the
likely outcome, such as settlement with the relevant
tax authority, the expiration of statutes of limitation
for the subject tax year, change in tax laws, or a
recent court case that addresses the matter.
Valuation allowances are recorded to reduce
deferred tax assets when it is more likely than not
that a tax benefit will not be realized. Significant
judgment is required in evaluating the need for and
magnitude of appropriate valuation allowances
against deferred tax assets. The realization of these
assets is dependent on generating future taxable
income, as well as successful implementation of
various tax planning strategies.
While International Paper believes that these judg-
ments and estimates are appropriate and reasonable
under the circumstances, actual resolution of these
matters may differ from recorded estimated
amounts.
The Company’s effective income tax rates, before
equity earnings and discontinued operations, were
32%, 21% and 27% for 2012, 2011 and 2010,
respectively. These effective tax rates include the tax
effects of certain special items that can significantly
affect the effective income tax rate in a given year,
but may not recur in subsequent years. Management
believes that the effective tax rate computed after
excluding these special items may provide a better
estimate of the rate that might be expected in future
years if no additional special items were to occur in
those years. Excluding these special items, the effec-
tive income tax rate for 2012 was 29% of pre-tax
earnings compared with 32% in 2011 and 30% in
2010 . We estimate that the 2013 effective income tax
rate will be approximately 31-33% based on
expected earnings and business conditions.
RECENT ACCOUNTING DEVELOPMENTS
There were no new accounting pronouncements
issued or effective during the fiscal year which have
had or are expected to have a material impact on the
Company’s consolidated financial statements. See
Note 2 Recent Accounting Developments on pages
54 through 55 of Item 8. Financial Statements and
Supplementary Data for a discussion of new
accounting pronouncements.
LEGAL PROCEEDINGS
Information concerning the Company’s environ-
mental and legal proceedings is set forth in Note 10
Commitments and Contingencies on pages 65
through 69 of Item 8. Financial Statements and Sup-
plementary Data.
EFFECT OF INFLATION
While inflationary increases in certain input costs,
such as energy, wood fiber and chemical costs, have
an impact on the Company’s operating results,
changes in general inflation have had minimal
impact on our operating results in each of the last
three years. Sales prices and volumes are more
strongly influenced by economic supply and demand
factors in specific markets and by exchange rate fluc-
tuations than by inflationary factors.
FOREIGN CURRENCY EFFECTS
International Paper has operations in a number of
countries. Its operations in those countries also
export to, and compete with, imports from other
regions. As such, currency movements can have a
number of direct and indirect impacts on the
Company’s financial statements. Direct impacts
include the translation of international operations’
local currency financial statements into U.S. dollars.
Indirect impacts include the change in competitive-
ness of imports into, and exports out of, the United
States (and the impact on local currency pricing of
products that are traded internationally). In general, a
lower U.S. dollar and stronger local currency is
beneficial to International Paper. The currencies that
have the most impact are the Euro, the Brazilian real,
the Polish zloty and the Russian ruble.
MARKET RISK
We use financial instruments, including fixed and
variable rate debt, to finance operations, for capital
spending programs and for general corporate pur-
poses. Additionally, financial instruments, including
various derivative contracts, are used to hedge
exposures to interest rate, commodity and foreign
currency risks. We do not use financial instruments for
41