Johnson Controls 2012 Annual Report Download - page 46

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Based on information provided by its independent actuaries and other relevant sources, the Company believes that
the assumptions used are reasonable; however, changes in these assumptions could impact the Company’s financial
position, results of operations or cash flows.
Product Warranties
The Company offers warranties to its customers depending upon the specific product and terms of the customer
purchase agreement. A typical warranty program requires that the Company replace defective products within a
specified time period from the date of sale. The Company records an estimate of future warranty-related costs based
on actual historical return rates and other known factors. Based on analysis of return rates and other factors, the
adequacy of the Company’s warranty provisions are adjusted as necessary. At September 30, 2012, the Company
had recorded $278 million of warranty reserves. The Company monitors its warranty activity and adjusts its reserve
estimates when it is probable that future warranty costs will be different than those estimates.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, ―Income Taxes.‖ Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and other loss
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The Company
records a valuation allowance that primarily represents non-U.S. operating and other loss carryforwards for which
utilization is uncertain. Management judgment is required in determining the Company’s provision for income
taxes, deferred tax assets and liabilities and the valuation allowance recorded against the Company’s net deferred tax
assets. In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual
effective tax rate based upon the facts and circumstances known at each interim period. On a quarterly basis, the
actual effective tax rate is adjusted as appropriate based upon the actual results as compared to those forecasted at
the beginning of the fiscal year. In determining the need for a valuation allowance, the historical and projected
financial results of the legal entity or consolidated group recording the net deferred tax asset are considered, along
with any other positive or negative evidence. Since future financial results may differ from previous estimates,
periodic adjustments to the Company’s valuation allowance may be necessary. At September 30, 2012, the
Company had a valuation allowance of $766 million, of which $619 million relates to net operating loss
carryforwards primarily in France and Spain, for which sustainable taxable income has not been demonstrated; and
$147 million for other deferred tax assets. Given the current economic uncertainty, it is reasonably possible that over
the next twelve months, valuation allowances against deferred tax assets in certain jurisdictions may result in a net
increase to tax expense of up to $400 million.
The Company is subject to income taxes in the U.S. and numerous non-U.S. jurisdictions. Judgment is required in
determining its worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary
course of the Company’s business, there are many transactions and calculations where the ultimate tax
determination is uncertain. The Company is regularly under audit by tax authorities. At September 30, 2012, the
Company had unrecognized tax benefits of $1,465 million.
The Company does not provide additional U.S. income taxes on undistributed earnings of non-U.S. consolidated
subsidiaries included in shareholders’ equity attributable to Johnson Controls, Inc. Such earnings could become
taxable upon the sale or liquidation of these non-U.S. subsidiaries or upon dividend repatriation. The Company’s
intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when it would be tax
effective through the utilization of foreign tax credits. Refer to ―Capitalization‖ within the ―Liquidity and Capital
Resources‖ section for discussion of domestic and foreign cash projections.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2012, the FASB issued Accounting Standards Update (ASU) No. 2012-02, ―Intangibles – Goodwill and
Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.‖ ASU No. 2012-02 provides
companies an option first to assess qualitative factors to determine whether the existence of events and
circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, as a
result of the qualitative assessment, it is determined that it is not more likely than not that the indefinite-lived
intangible assets is impaired, then the Company is not required to take further action. ASU No. 2012-02 will be
effective for the Company for impairment tests of indefinite-lived intangible assets performed in the fiscal year
ending September 30, 2013, with early adoption permitted. The adoption of this guidance will have no impact on the
Company’s consolidated financial condition and results of operations.