JP Morgan Chase 2003 Annual Report Download - page 115

J.P. Morgan Chase & Co. / 2003 Annual Report 113
The follow ing table presents the after-tax changes for net unre-
alized holdings gains (losses) and reclassification adjustments
in unrealized gains and losses on AFS securities and cash flow
hedges. Reclassification adjustments include amounts recog-
nized in net income during the current year that had been
previously recorded in Other comprehensive income.
Year ended December 31, (in millions) 2003 2002 2001
Unrealized gains (losses) on AFS securit ies:
Net unrealized holdings gains (losses)
arising during the period, net of taxes(a) $149 $1,090 $ 443
Reclassification adjustment for gains
included in income, net of taxes(b) (861) (224) (334)
Net change $(712) $866 $ 109
Cash flow hedges:
Net unrealized holdings gains (losses)
arising during the period, net of taxes(c) $86$663 $ (356)
Reclassification adjustment for (gains) losses
included in income, net of taxes(d) (631) 144 51
Net change $(545) $807 $ (305)
(a) Net of tax expense of $92 million for 2003, $758 million for 2002 and $308 million for 2001.
(b) Net of tax expense of $528 million for 2003, $156 million for 2002 and $232 million in 2001.
(c) Net of tax expense of $60 million for 2003 and $461 million for 2002, and net of tax benefit
of $247 million for 2001.
(d) Net of tax expense of $438 million for 2003, and net of tax benefit of $100 million for 2002
and $35 million for 2001.
Income taxes
JPM organ Chase and its eligible subsidiaries file a consolidated
U.S. federal income tax return. JPM organ Chase uses the asset
and liability method required by SFAS 109 to provide income
taxes on all transactions recorded in the Consolidated financial
statements. This requires that income taxes reflect the expected
future tax consequences of temporary differences betw een the
carrying amounts of assets or liabilities for book and tax purposes.
Accordingly, a deferred tax liability or asset for each temporary
difference is determined based on the tax rates that JPM organ
Chase expects to be in effect when the underlying items of
income and expense are to be realized. JPM organ Chase’s
expense for income taxes includes the current and deferred por-
tions of that expense. A valuation allow ance is established to
reduce deferred tax assets to the amount JPM organ Chase
expects to be realized.
Note 24
Deferred income tax expense (benefit) results from differences
betw een assets and liabilities measured for financial reporting
and for income tax return purposes. The significant compo-
nents of deferred tax assets and liabilities are reflected in the
following table:
December 31, (in millions) 2003 2002
Deferred t ax assets
Employee benefits $2,245 $1,621
Allowance for loan losses 1,410 1,675
Allowance for other than loan losses 1,152 1,251
Non-U.S. operations 741 1,055
Foreign tax credit carryforward 23(a) 25
Gross deferred tax assets $5,571 $5,627
Deferred t ax liabilit ies
Leasing transactions $3,703 $3,175
Depreciation and amortization 1,037 857
Fair value adjustments 538 1,107
Non-U.S. operations 687 403
Other, net 478 379
Gross deferred tax liabilities $6,443 $5,921
Valuation allowance $160 $165
Net deferred tax asset (liability) $(1,032) $(459)
(a) Includes $18 million and $5 million expiring in 2005 and 2007, respectively.
A valuation allow ance has been recorded in accordance with
SFAS 109, primarily relating to deferred tax assets associated w ith
non-U.S. operations.
The components of income tax expense included in the
Consolidated statement of income w ere as follow s:
Year ended December 31, (in millions) 2003 2002 2001
Current income tax expense (benefit)
U.S. federal $965 $(1,334) $ 598
Non-U.S. 741 461 822
U.S. state and local 175 93 65
Total current expense (benefit) 1,881 (780) 1,485
Deferred income tax expense (benefit)
U.S. federal 1,341 1,630 (618)
Non-U.S. 14 (352) (73)
U.S. state and local 73 358(a) 53
Total deferred expense (benefit) 1,428 1,636 (638)
Total income tax expense $3,309 $856 $ 847
(a) The increase in 2002 is principally attributable to the level of income in certain state and local
tax jurisdictions in 2002.
The preceding table does not reflect the tax effects of unrealized
gains and losses on AFS securities, SFAS 133 hedge transactions
and certain tax benefits associated w ith JPM organ Chase’s
employee stock plans. The tax effect of these items is recorded
directly in Stockholders’ equity. Stockholders’ equity increased by
$898 million and $541 million in 2003 and 2001, respectively, and
decreased by $1.1 billion in 2002 as a result of these tax effects.