International Paper 2015 Annual Report Download - page 81

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was filed in British Columbia, Canada. In May 2015, we
reached an agreement in principle to settle these
Canadian cases for an immaterial amount. In
November 2015, a definitive settlement agreement was
executed and is subject to court approval.
Tax
On October 16, 2015, the Company was notified of a
$92 million tax assessment issued by the state of Sao
Paulo, Brazil for tax years 2011 through 2013. The
assessment pertains to invoices issued by the
Company related to the sale of paper to the editorial
segment, which is exempt from the payment of ICMS
value-added tax. This assessment is in the preliminary
stage. The Company does not believe that a material
loss is probable.
General
The Company is involved in various other inquiries,
administrative proceedings and litigation relating to
environmental and safety matters, labor and
employment, contracts, sales of property, intellectual
property, personal injury and other matters, some of
which allege substantial monetary damages. While any
proceeding or litigation has the element of uncertainty,
the Company believes that the outcome of any of these
lawsuits or claims that are pending or threatened or all
of them combined (other than those that cannot be
assessed due to their preliminary nature) will not have
a material effect on its consolidated financial
statements.
NOTE 12 VARIABLE INTEREST ENTITIES
In connection with the 2006 sale of approximately 5.6
million acres of forestlands, International Paper
received installment notes (the Timber Notes) totaling
approximately $4.8 billion. The Timber Notes, which do
not require principal payments prior to their maturity
which was originally August 2016, are supported by
irrevocable letters of credit obtained by the buyers of
the forestlands.
During 2006, International Paper contributed the
Timber Notes to newly formed special purpose entities
(the Borrower Entities) in exchange for Class A and
Class B interests in these entities. Subsequently,
International Paper contributed its $200 million Class A
interests in the Borrower Entities, along with
approximately $400 million of International Paper
promissory notes, to other newly formed special
purpose entities (the Investor Entities, and together with
the Borrower Entities, the Entities) in exchange for
Class A and Class B interests in these entities, and
simultaneously sold its Class A interest in the Investor
Entities to a third party investor. As a result, at
December 31, 2006, International Paper held Class B
interests in the Borrower Entities and Class B interests
in the Investor Entities valued at approximately $5.0
billion. International Paper did not provide any financial
support that was not previously contractually required
for the years ended December 31, 2015, 2014, or 2013.
Following the 2006 sale of forestlands and creation of
the Entities discussed above, the Timber Notes were
used as collateral for borrowings from third party
lenders, which effectively monetized the Timber Notes.
Also during 2006, the Entities acquired approximately
$4.8 billion of International Paper debt obligations for
cash, resulting in a total of approximately $5.2 billion of
International Paper debt obligations held by the Entities
at December 31, 2006. The various agreements
entered into in connection with these transactions
provided that International Paper had, and intended to
effect, a legal right to offset its obligation under these
debt instruments with its investments in the Entities.
Accordingly, for financial reporting purposes,
International Paper had offset approximately $5.2
billion of Class B interests in the Entities against $5.3
billion of International Paper debt obligations held by
these Entities at December 31, 2014, and despite the
offset treatment, these remained debt obligations of
International Paper. Remaining borrowings of $50
million are included in Long-term debt in the
accompanying consolidated balance sheet at
December 31, 2014. Additional debt related to the
above transaction of $107 million is included in Notes
payable and current maturities of long-term debt at
December 31, 2014.
The use of the Entities facilitated the monetization of
the credit enhanced Timber Notes in a cost effective
manner by increasing borrowing capacity and lowering
the interest rate, while providing for the offset
accounting treatment described above. Additionally, the
monetization structure preserved the $1.4 billion tax
deferral that resulted from the 2006 forestlands sales.
Based on an analysis of the Entities under ASC 810,
"Consolidation," that considers the potential magnitude
of the variability in the structures and which party has
a controlling financial interest, International Paper
determined that it was not the primary beneficiary of the
Entities at December 31, 2014, and therefore, did not
consolidate its investments in the Entities. The
Company also determined that the source of variability
in the structures is the value of the Timber Notes, the
assets most significantly impacting the structures'
economic performance. The credit quality of the Timber
Notes is supported by irrevocable letters of credit
obtained by the Timber Note issuers. International
Paper analyzed which party had control over the
economic performance of each Entity, and concluded
International Paper did not have control over significant
decisions surrounding the Timber Notes and letters of