JP Morgan Chase 2005 Annual Report Download - page 122

Notes to consolidated financial statements
JPMorgan Chase & Co.
120 JPMorgan Chase & Co. /2005 Annual Report
The following table presents the after-tax changes in net unrealized holdings
gains (losses) and the reclassification adjustments in unrealized gains and
losses on AFS securities and cash flow hedges. Reclassification adjustments
include amounts recognized in net income during the current year that had
been previously recorded in Other comprehensive income.
Year ended December 31, (in millions)(a) 2005 2004 2003
Unrealized gains (losses) on AFS securities:
Net unrealized holdings gains (losses)
arising during the period, net of taxes(b) $ (1,058) $ 41 $ 149
Reclassification adjustment for (gains) losses
included in income, net of taxes(c) 895 (121) (861)
Net change $ (163) $ (80) $ (712)
Cash flow hedges:
Net unrealized holdings gains (losses)
arising during the period, net of taxes(d) $ (283) $34 $ 86
Reclassification adjustment for (gains) losses
included in income, net of taxes(e) 28 (130) (631)
Net change $ (255) $ (96) $ (545)
(a) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.
(b) Net of income tax expense (benefit) of $(648) million for 2005, $27 million for 2004 and
$92 million for 2003.
(c) Net of income tax expense (benefit) of $(548) million for 2005, $79 million for 2004 and
$528 million for 2003.
(d) Net of income tax expense (benefit) of $(187) million for 2005, $23 million for 2004 and
$60 million for 2003.
(e) Net of income tax expense (benefit) of $(18) million for 2005 and $86 million for 2004 and
$438 million for 2003.
Note 22 – Income taxes
JPMorgan Chase and eligible subsidiaries file a consolidated U.S. federal
income tax return. JPMorgan 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 method requires that income
taxes reflect the expected future tax consequences of temporary differences
between 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 upon the tax rates that the Firm expects to be in effect
when the underlying items of income and expense are realized. JPMorgan
Chase’s expense for income taxes includes the current and deferred portions
of that expense. A valuation allowance is established to reduce deferred tax
assets to the amount the Firm expects to realize.
Due to the inherent complexities arising from the nature of the Firm’s busi-
nesses, and from conducting business and being taxed in a substantial number
of jurisdictions, significant judgments and estimates are required to be made.
Agreement of tax liabilities between JPMorgan Chase and the many tax
jurisdictions in which the Firm files tax returns may not be finalized for
several years. Thus, the Firm’s final tax-related assets and liabilities may
ultimately be different.
Deferred income tax expense (benefit) results from differences between assets
and liabilities measured for financial reporting and for income-tax return
purposes. The significant components of deferred tax assets and liabilities are
reflected in the following table:
December 31, (in millions) 2005 2004
Deferred tax assets
Allowance for other than loan losses $ 3,554 $ 3,711
Employee benefits 3,381 2,677
Allowance for loan losses 2,745 2,739
Non-U.S. operations 807 743
Fair value adjustments 531 —
Gross deferred tax assets $ 11,018 $ 9,870
Deferred tax liabilities
Depreciation and amortization $ 3,683 $ 3,558
Leasing transactions 3,158 4,266
Fee income 1,396 1,162
Non-U.S. operations 1,297 1,144
Fair value adjustments —186
Other, net 149 348
Gross deferred tax liabilities $ 9,683 $10,664
Valuation allowance $110 $ 150
Net deferred tax asset (liability) $ 1,225 $ (944)
A valuation allowance has been recorded in accordance with SFAS 109,
primarily relating to deferred tax assets associated with certain portfolio
investments.
The components of income tax expense included in the Consolidated statements
of income were as follows:
Year ended December 31, (in millions)(a) 2005 2004 2003
Current income tax expense
U.S. federal $ 4,269 $ 1,695 $ 965
Non-U.S. 917 679 741
U.S. state and local 337 181 175
Total current expense 5,523 2,555 1,881
Deferred income tax (benefit) expense
U.S. federal (2,063) (382) 1,341
Non-U.S. 316 (322) 14
U.S. state and local (44) (123) 73
Total deferred (benefit) expense (1,791) (827) 1,428
Total income tax expense $ 3,732 $ 1,728 $ 3,309
(a) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.
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 with the Firm’s employee stock plans. The tax effect of these items
is recorded directly in Stockholders’ equity. Stockholders’ equity increased
by $425 million, $431 million and $898 million in 2005, 2004 and 2003,
respectively, as a result of these tax effects.
U.S. federal income taxes have not been provided on the undistributed earnings
of certain non-U.S. subsidiaries, to the extent that such earnings have been
reinvested abroad for an indefinite period of time. For 2005, such earnings
approximated $333 million on a pre-tax basis. At December 31, 2005, the
cumulative amount of undistributed pre-tax earnings in these subsidiaries
approximated $1.5 billion. It is not practicable at this time to determine the
income tax liability that would result upon repatriation of these earnings.