FIN 48 Accounting for Uncertainty in Income Taxes and Other FAS 109 Topics

1. FIN 48Accounting for Uncertainty in Income Taxesand Other FAS 109 Topics

2. Introductions & Agenda

3. Introductions Glen Kohl, Sr. VP, Tax and TreasuryElectronic Arts Jeff Sokol, PartnerDeloitte Rob Terpening, PartnerBDO Seidman LLP Rusty Thomas, PartnerKPMG Neil Traubenberg, Vice President, TaxSun Microsystems Glen � Need biosGlen � Need bios

4. Today�s Agenda FIN 48 � Overview FIN 48 � Difficult Issues FAS 109 Common Errors GlenGlen

5. Overview - Reason for Interpretation Diverse accounting practices in applying Statement 109 Lack of comparability Evolution of the Standard Comment Letters Glen, Neil, DonaldGlen, Neil, Donald

6. Scope � What is a Tax Position? Tax benefit on return filed or expected to be filed Reduce income tax expense, taxes paid or payable Increase tax benefit and receivable, DTA or refund Decision not to file a return Allocation or shift of income between jurisdictions A characterization of income A decision to exclude income, or treatment of a transaction, entity or other position as tax exempt Jeff Jeff

7. Step 1 � Initial Recognition of Tax Benefits Determine �unit of account� Facts and circumstances in light of all available evidence Consider: Manner in which company prepares and supports tax return Approach the company anticipates the taxing authority will take during an examination Jeff Jeff

8. Step 1 � Initial Recognition of Tax Benefits In order to recognize any amount of benefit, for the unit of account, the position must be MLTN of being sustained based solely on the technical merits The position will be examined The examiner will have full knowledge of all relevant information Evaluation based solely on the technical merits No offset or aggregation of positions Conclusion should assume resolution in the court of last resort Jeff Jeff

9. Step 1 � Initial Recognition of Tax Benefits Highly certain tax positions Clear and unambiguous tax law Consistent with �will prevail� opinion Extent of evidence and documentation requires judgment Administrative practices and precedent Applies where there has been a technical violation of law Expected to be relevant infrequently Evidence and documentation Jeff Jeff

10. Step 2 - Measurement For a tax position that meets the more-likely-than-not recognition threshold� Measure initially and subsequently as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information Consider the amounts and probabilities of the outcomes that could be realized upon ultimate settlement Based on facts, circumstances, and information available at the reporting date Jeff Jeff

11. Illustrative Guidance � Measurement with Information about Approach to Settlement Scenario The enterprise has determined that a tax position resulting in a benefit of $100 qualifies for recognition and accordingly should be measured The enterprise has considered the amounts and probabilities of the estimated outcomes. Jeff Jeff

12. Illustrative Guidance � Measurement with Information about Approach to Settlement Table of Probabilities & Estimated Outcomes JeffJeff

13. Illustrative Guidance � Measurement with Information about Approach to Settlement $60 is the largest amount of benefit that is greater than 50% likely of being realized upon settlement Actually it�s $60 or more that is greater than 50% likely of being realized upon settlement Probability of $60 itself is only 25% The �At least� Test: Book the largest number as to which it is more likely than not that the taxpayer will realize at least that number. Jeff Jeff

14. Illustrative Guidance � Measurement with Information about Approach to Settlement Table of Probabilities & Estimated Outcomes Jeff Jeff

15. Illustrative Guidance � Measurement with Information about Approach to Settlement Table of Probabilities & Estimated Outcomes Jeff Jeff

16. Tax Planning Strategies and Valuation Allowance Tax planning strategies Consideration required under FAS 109 Discussed in paragraphs 20-22 of FAS 109 in conjunction with future realizability of DTA, and corresponding need for (and size of) valuation allowance If contemplated as source of future taxable income to support realizability of DTA, must meet recognition and measurement criteria of FIN 48 RustyRusty

17. Subsequent Recognition, Derecognition, & Measurement Subsequent Recognition A tax position which previously did not meet the recognition threshold gets recognized in the first interim period in which: The more-likely-than-not recognition threshold is met by the reporting date, or The tax matter is settled through negotiation or litigation, or The statute of limitations for the tax position has expired A tax matter need not be legally extinguished to subsequently recognize or measure a tax position Based on management�s best judgment in view of facts, circumstances, and information available at reporting date Rusty Rusty

18. Subsequent Recognition, Derecognition, & Measurement (continued) Derecognition Derecognize (previously recognized) tax position in the first interim reporting period in which it is no longer more likely than not that the position will be sustained upon examination Valuation allowance is not a substitute for derecognition Based on management�s best judgment in view of facts, circumstances, and information available at reporting date Rusty Rusty

19. Changes in Judgment Changes in judgment resulting in subsequent recognition, derecognition, or change in measurement of tax position taken previously If initial tax position was taken in prior annual period, recognize change as �discrete� item in period of change If initial tax position was taken in prior interim period within same fiscal year, apply APB 28 (Interim Financial Reporting) and FIN 18 (Accounting for Income Taxes in Interim Periods) to take change into account over remaining periods in fiscal year using effective tax rate calculated for interim period Based on evaluation of new information � not new evaluation, or new interpretation by management, of information that was available in previous period Analysis must be conducted every reported period Rusty Rusty

20. Interest and Penalties Interest FIN 48 requires accrual if position in tax return is not recognized in financial statements under FIN 48 When tax law requires interest on underpayment, start recognizing in 1st period it would begin accruing under tax law Amount is statutory interest rate times difference between FIN 48 tax position and amount taken in tax return Penalties Recognize when tax position does not meet minimum statutory threshold to avoid payment of penalties Recognize in period in which company claims or expects to claim position in tax return Rusty Rusty

21. Classification �Unrecognized tax benefit� concept Difference between position in tax return and benefit recognized and measured under FIN 48 Creates liability (or reduces amount refundable or DTA, e.g., NOL) Represents company�s potential future obligation to taxing authority for tax position taken in tax return but not recognized pursuant to FIN 48 recognition/measurement guidance Again, not actually limited to positions in return but to any tax position Liability is current or non-current based on expected timing of payment of cash Current if within one year (or operating cycle, if longer) Liability recognized is generally not a deferred tax liability DTL only if it arises from a taxable temporary difference Interest recognized under FIN 48 � Accounting policy decision to classify as either income taxes or interest expense Rusty Rusty

22. Disclosures Accounting policy for classification of interest and penalties At the end of each annual reporting period: Tabular �rollforward� of unrecognized tax benefits (�UTBs�) at beginning and end of period Total amount of UTBs that, if recognized, would affect the effective tax rate Total amount of interest and penalties recognized in the income statement and balance sheet Description of tax years that remain subject to examination by major jurisdictions Paragraph 21(d) - Positions where it is reasonably possible that the total amounts of UTBs will significantly increase or decrease within 1 year of reporting date Nature of uncertainty Nature of event that would cause the change Estimate of range of change, or statement that �can�t estimate� Rob Rob

23. Disclosures Tabular rollforward includes: Gross amts of increases & decreases in UTBs as a result of tax positions taken during a prior period Gross amts of increases & decreases in UTBs as a result of tax positions taken during the current period Decreases in UTBs relating to settlements with taxing authorities Decreases in UTBs resulting from lapses in statutes of limitations Rob Rob

24. Illustrative Guidance - Tabular Rollforward Rob Rob

25. Disclosures Rollforward/reconciliation �roadmap�? FIN 48 tabular rollforward requires disclosures only at aggregate level, not at individual tax position level Not by jurisdiction Not tax position by tax position Rob But, paragraph 21(d) which requires disclosure regarding the nature of the uncertainty and the event which would cause a change? Rob But, paragraph 21(d) which requires disclosure regarding the nature of the uncertainty and the event which would cause a change?

26. Disclosures Paragraph 21(d) Positions where it is reasonably possible that the total amounts of UTBs will significantly increase or decrease within 12 months of reporting date Disclose the nature of uncertainty (i.e. describe tax position) Disclose the nature of event that would cause the change Estimate of range of change, or statement that �can�t estimate� Rob Rob

27. The �Reasonably Possible� Catch-22 Rob - If an enterprise discloses a reserve reversal � say for a statute expiration in 9 months � will that cause the tax authorities to come in an audit the enterprise before the statute runs, thereby negating the reserve reversal?!Rob - If an enterprise discloses a reserve reversal � say for a statute expiration in 9 months � will that cause the tax authorities to come in an audit the enterprise before the statute runs, thereby negating the reserve reversal?!

28. Disclosures Paragraph 21(d) � (cont.) One of the more controversial areas of FIN 48 disclosures � Define �reasonably possible� Includes tax positions that are both recognized as well as not yet recognized (due to �reasonably possible� range including probabilities above and below MLTN). �Nature of Uncertainty� � how much detail must be disclosed? Boiler-plate will not be acceptable Significant analysis, documentation and judgment All this must be performed and disclosed in the correct reporting period. Close scrutiny will be applied to evaluate the quality of the effort and conclusions arrived at in prior periods. Documentation will be an important source of evidence of past analysis and thought process. Rob Rob

29. Effective Date and Transition Effective for FYs beginning after December 15, 2006 e.g., calendar year 2007 companies Early adoption permitted (provided company hasn�t yet issued interim financials for that FY) Apply more-likely-than-not threshold to all income tax positions for all open years Recognize cumulative effect of applying FIN 48 as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the balance sheet) SAB 74 requires disclosure of impact of FIN 48 on public company financial statements Rob Rob

30. FIN 48 � Difficult Issues

31. FIN 48 � Difficult Issues Must all tax positions be evaluated for recognition (and correspondingly documented)? Said differently, are there tax positions, e.g., transfer pricing, that lend themselves solely to the measurement test? Exposure draft seemed to acknowledge these issues were more valuation questions, where �technical merits� type of issues don�t come into play.

32. FIN 48 � Difficult Issues FIN 48 defines scope to include all tax positions. As a matter of practicality, highly certain tax positions do not need to be analyzed. To what extent should companies document tax positions as being highly-certain tax positions? [comment to group: many commentators are talking about whether the approach should be top down or bottom up. We should explain what this means, what the different firms are saying and have a slide on it. [comment to group: many commentators are talking about whether the approach should be top down or bottom up. We should explain what this means, what the different firms are saying and have a slide on it.

33. FIN 48 � Difficult Issues To what extent should FIN 48 be implemented by way of a �bottom-up� inventory approach (i.e., by identifying all material tax positions for each �open� tax year for each jurisdiction) vs. a �top-down approach� (i.e., by starting with identified material uncertain tax positions)?

34. FIN 48 � Difficult Issues As a result of NOLs or tax credits, the statute of limitations related to certain historical periods is often extended to align with the statutes for years in which attributes were utilized. Notwithstanding the scope of all possible open periods, taxing authorities often limit their examination to years defined within a particular cycle. Is it appropriate to rely on this administrative practice to recognize tax benefits in periods prior to the defined cycle?

35. FIN 48 � Difficult Issues How should a company apply the measurement standard to positions likely to be sustained or disallowed entirely (e.g., qualification for section 199 deduction where contract manufacturer relationship exists) � i.e., binary issues? Is it possible that a position that can be recognized pursuant to the MLTN threshold will be measured such that a benefit of less than 50% is recorded?

36. FIN 48 � Difficult Issues To what extent may a company contemplate �horse trading� � (i.e. using in measurement information about using one position to settle another)? Said differently, can an entity use aggregation of positions or offsetting in measuring a tax position?

37. FIN 48 � Difficult Issues There appears to be inconsistency between paragraph 10 and paragraph 12 about when entities should subsequently recognize, derecognize and measure a tax position. Paragraph 10 gives three situations which an entity can use additional information to subsequently recognize the benefits of a tax position including �the tax matter is ultimately settled through negotiation or litigation.� Paragraph 12 indicates that a tax position need not be legally extinguished and its resolution need not be certain to subsequently recognize or measure the position.

38. FIN 48 � Difficult Issues Can an entity that has a previously recognized position (i.e., met the more-likely-than not criteria) change the measurement of that position when a tax audit closes and the position was not challenged (notwithstanding the statute of limitation might remain open)? Assume the position was adequately disclosed on the tax return and the subject to IDRs and discussion with the IRS. The case went to appeals and this is not one of the issues as to which there is a proposed adjustment. Of course, there was no closing agreement with respect to that tax position.

39. FIN 48 � Difficult Issues A taxing authority completes an audit and requires an adjustment to a tax position that was not included in the company�s inventory of uncertain tax position. The company is inclined to cave on this issue. Is the addition of that item to the inventory of uncertain tax positions an error or a change in estimate?

40. FIN 48 � Difficult Issues Would an entity with NOLs and a full valuation allowance be required to disclose any amounts in their unrecognized tax benefits roll-forward? For example, an entity has $1M R&D credit carryforward for which $900K can be recorded by applying the principle of FIN 48. Would the entity need to reflect the $100K in the FIN 48 tabular disclosure (notwithstanding the NOL DTA would not be recognized in any event due to valuation allowance assumptions)?

41. FIN 48 � Difficult Issues Consider a scenario where a company owns a hybrid flow-through entity subject to tax in a local jurisdiction in addition to being taxed in the U.S. Does the disclosure requirements of paragraph 21 require that a FIN 48 liability be disclosed to the extent that a local country exposure item, notwithstanding that any increased local tax expense would produce a corresponding US foreign tax credit (economically mitigating the risk item � assuming no U.S. foreign tax credit limitations)?

42. FIN 48 � Difficult Issues Will entities be required to disclose the fact that the statute of limitations is going to expire in the next twelve months which will create a significant change?

43. FIN 48 � Difficult Issues Under FAS 123(R), there is a requirement that the tax benefit associated with the excess tax deduction be realized by reducing taxes payable. Since FIN 48 requires that a contingent tax payable be accrued, it would appear that it should be offset by the excess tax deductions not otherwise recognized (so the entry is to debit current tax provision and credit APIC). If the tax position is not later challenged or if the taxpayer prevails, then the APIC was never realized. Should it then be reversed so that the provision can be credited?

44. FIN 48 � Difficult Issues Can tax positions that are not individually significant be evaluated in the aggregate when the aggregated amount is material? Consider, for example, transfer pricing for commission agent or stripped buy/sell subsidiaries, or intercompany debt financing with operating subsidiaries.

45. FAS 109 � Common Errors

46. Tax Accounting for Business Comb. � Foreign Subsidiaries of Target Same general tax accounting principles apply; deferred tax reporting for book/tax basis differences of inside basis assets/liabilities Must apply �push down� accounting concepts, even if purchase accounting adjustments maintained in consolidation In purchase accounting DTA/DTL establishment, imperative that appropriate jurisdictional rates be respected 1a- Rusty The application of tax acctg in bcs can also get interesting in the context of foreign subs The big issue here is that it is not uncommon for top level entries to be made in purchase acctg, where the implications are not fully pushed down to the foreign operating entities for purposes of G/L and management reporting It is critical that in applying the tax acctg to the bc that push down acctg concepts be respected, and the appropriate jurisdictional rates be applied for the temp diffs created from the acqu One thing to keep in mind after the purch acctg is the implications of foreign exchange fluctuations in subsequent periods for such balances recorded at corp; One example might be in the tax contingency reserve area, where you include the non-US reserves is one aggregate pool at corporate; notwithstanding the general rule that assumed tax contingency reserve settlements go first against g/w, the FAS52 implications from forex rate changes would not be applied against g/w Instead to P&L if US$ fc, CTA if local currency fc We�ll have an example about this in a second1a- Rusty The application of tax acctg in bcs can also get interesting in the context of foreign subs The big issue here is that it is not uncommon for top level entries to be made in purchase acctg, where the implications are not fully pushed down to the foreign operating entities for purposes of G/L and management reporting It is critical that in applying the tax acctg to the bc that push down acctg concepts be respected, and the appropriate jurisdictional rates be applied for the temp diffs created from the acqu One thing to keep in mind after the purch acctg is the implications of foreign exchange fluctuations in subsequent periods for such balances recorded at corp; One example might be in the tax contingency reserve area, where you include the non-US reserves is one aggregate pool at corporate; notwithstanding the general rule that assumed tax contingency reserve settlements go first against g/w, the FAS52 implications from forex rate changes would not be applied against g/w Instead to P&L if US$ fc, CTA if local currency fc We�ll have an example about this in a second

47. Jurisdictional Rate Example - Cost Sharing Structure in Target � Nontaxable business combination Acquiror (A) has a global effective rate of 30% and a US effective tax rate of 40% Target has a mature cost sharing structure � 50% non-US participant in Singapore Target (B) has 25% overall tax rate (US 40%, 10% blended non-US rate; 0% rate in Caymans) Purchase accounting � only identifiable intangible is product rights/IP of $40M WHAT RATE TO USE FOR THE PURCHASE ACCOUNTING DTL? 1b - Rusty Assume a nontaxable bus comb Acquiror has an effective tax rate on its domestic US operations of 40% Target has a mature R&D cost sharing structure, with a 50% non-US participant in a zero tax jurisdiction Targets effective tax rate is 40% in US, and blended 10% non-US, for an overall 25% rate The 10% non-US rate is due to high taxed sales subs leveraged down by the zero rate cost sharing co The only idenfif intangible is $40M of acquired product rights, all of which have been derived from the R&D embedded in the cost sharing arrangement between the Caymans and the US parent What rate to use for DTL? 40%? 30%? 25%? 20%? Well, I believe one must look at which entity is the tax holder of the identif intangibles In this case, Caymans holds the non-US rights, assumed to be 50% in this example, and the US target parent holds the US rights, also 50% So in determining the dtl, $20M of the ident int would be applied at a 0% rate, and $20M at the US 40% rate Again, this is something often missed in purchase accounting, as the standard procedure might be to just apply the effective tax rate of the US company1b - Rusty Assume a nontaxable bus comb Acquiror has an effective tax rate on its domestic US operations of 40% Target has a mature R&D cost sharing structure, with a 50% non-US participant in a zero tax jurisdiction Targets effective tax rate is 40% in US, and blended 10% non-US, for an overall 25% rate The 10% non-US rate is due to high taxed sales subs leveraged down by the zero rate cost sharing co The only idenfif intangible is $40M of acquired product rights, all of which have been derived from the R&D embedded in the cost sharing arrangement between the Caymans and the US parent What rate to use for DTL? 40%? 30%? 25%? 20%? Well, I believe one must look at which entity is the tax holder of the identif intangibles In this case, Caymans holds the non-US rights, assumed to be 50% in this example, and the US target parent holds the US rights, also 50% So in determining the dtl, $20M of the ident int would be applied at a 0% rate, and $20M at the US 40% rate Again, this is something often missed in purchase accounting, as the standard procedure might be to just apply the effective tax rate of the US company

48. Interplay of APB23 and CTA For affiliates reporting in non-US$ FC, currency translation adjustments (CTA) are a component of OCI If all or a portion of unremitted earnings are not indefinitely reinvested under APB23, deferred tax reporting required on proportionate amount of CTA Recorded as a component of OCI Often overlooked, or complicated computations can be prone to errors 5 - Jeff5 - Jeff

49. Tax Effect of CTA on Unremitted Earnings US Tax DTL Entries (No APB 23 Reinvestment) Year 1: 1� = 1$ Dr. DTA (FTC) 200 Dr. Tax Provision 150 Cr. DTL 350 Year 2: 1� = 1.2$ Dr. OCI 70 Cr. DTL 70 Note that this slide was added after printingNote that this slide was added after printing

50. Valuation Allowance- Indefinite Lived Intangibles Deferred Tax Liabilities FAS 142, Goodwill and Other Intangible Assets, stipulates that indefinite-lived intangibles and goodwill are not amortized FAS 109 requires recognition of deferred tax liabilities and assets for temporary differences related to intangibles and goodwill and the tax-deductible portion of goodwill 9a - Rob9a - Rob

51. Valuation Allowance- Indefinite Lived Intangibles �Because indefinite-lived intangible assets and goodwill are not amortized, the related deferred tax liabilities will not reverse until some indeterminable future period (e.g., when the financial asset is impaired or disposed of) Due to the indeterminable reversal period of temporary differences related to indefinite-lived intangible assets and goodwill, such reversals normally should not be considered a source of future taxable income when assessing the realizability of deferred tax assets 9b - Rob9b - Rob

52. Assumed Stock Options from Acquisition - Vested NQSOs; deductible non-US Purchase accounting � FV in purchase price No DTA (EITF 00-23) Tax accounting � tax effect of section 83 deduction up to fair value reduces purchase price (excess to APIC) ISOs/ESPPs, nonded non-US Purchase accounting � FV in purchase price No DTA Tax � deductible if ISO or ESPP DD Tax accounting � tax effect of section 421(b) deduction to APIC 2a - Rusty Now let�s shift from the old world of APB25 to the new world of FAS123R Under 123R, the assumption of options in an acquisition are treated no differently for tax accounting than any issuance of options For VESTED options, again the FMV of the options is considered pp However, to the extent the options would ordinarily give rise to a deduction, a DTA can be established in purch acctg; EITF 00-23 applied only to APB25 Upon recognition of the tax deduction, the DTA is offset, with any excess deduction going to APIC, and any shortfall going against the infamous �123 APIC pool�, and then to tax expense for any residual For options not ordinarily giving rise to a deduction, there is no dTA established at the time of purch acctg, and any ultimate tax benefit goes to the APIC pool2a - Rusty Now let�s shift from the old world of APB25 to the new world of FAS123R Under 123R, the assumption of options in an acquisition are treated no differently for tax accounting than any issuance of options For VESTED options, again the FMV of the options is considered pp However, to the extent the options would ordinarily give rise to a deduction, a DTA can be established in purch acctg; EITF 00-23 applied only to APB25 Upon recognition of the tax deduction, the DTA is offset, with any excess deduction going to APIC, and any shortfall going against the infamous �123 APIC pool�, and then to tax expense for any residual For options not ordinarily giving rise to a deduction, there is no dTA established at the time of purch acctg, and any ultimate tax benefit goes to the APIC pool

53. Assumed Stock Options from Acquisition � Unvested NQSOs, deductible non-US Purchase accounting � FV in purchase price Fair value expensed over vesting period; DTA established (tax expense benefit) Tax accounting � tax effect of section 83 deduction applied against DTA, excess tax benefit to APIC; any shortfall to APIC pool, then to tax expense ISOs/ESPPs, nonded non-US Purchase accounting � FV in purchase price Fair value expensed over vesting period; permanent difference Tax accounting at time of DD � section 421 deduction yields tax expense benefit up to value of stock-based comp charge; excess to APIC 2 b Rusty For UNVESTED options under 123R, the rules get more complicated In contrast to APB25, which measured the deferred stock based comp charge on intrinsic value, 123R expense is based on the FMV of the option As this deferred comp charge is expensed for book purposes, a DTA is established to the extent the options are NQ and would be expected to give rise to a deduction The tax deduction would be applied against the DTA, with any excess to APIC and any shortfall against the 123 APIC pool, then to tax expense For options that ordinarily do not give rise to a deduction, the book expense of the dsbc charge is a perm diff Upon a disq disp, there would be a tax benefit up to the value to the book charge,, with any excess going to APIC Note option by option analysis 2 b Rusty For UNVESTED options under 123R, the rules get more complicated In contrast to APB25, which measured the deferred stock based comp charge on intrinsic value, 123R expense is based on the FMV of the option As this deferred comp charge is expensed for book purposes, a DTA is established to the extent the options are NQ and would be expected to give rise to a deduction The tax deduction would be applied against the DTA, with any excess to APIC and any shortfall against the 123 APIC pool, then to tax expense For options that ordinarily do not give rise to a deduction, the book expense of the dsbc charge is a perm diff Upon a disq disp, there would be a tax benefit up to the value to the book charge,, with any excess going to APIC Note option by option analysis

54. ETR vs. Discrete 6 - Jeff6 - Jeff

55. Consider Tax Effects of Certain Items State tax is deductible Current deduction Deferred tax effect Interest is deductible Foreign tax may be creditable 10 - Rob10 - Rob

56. ARB 51 � Intercompany Transfer of Assets Under ARB51, tax expense by selling affiliate on intercompany transfers should be deferred Deferred until asset leaves consolidate group (or is depreciated, amortized, or impaired) Treated as prepaid tax, not deferred tax Applicable not only to inventory transfers, but also intangibles (e.g., buy-in payments) Note applicability to post-acquisition buy-ins; if buy-in encompasses goodwill, tax expense deferred until impairment ARB51 expected to be changed in �07 in FASB Short-Term Convergence project 3 - Rusty3 - Rusty

57. Classification of Valuation Allowance 7 - Jeff7 - Jeff

58. Subsequent Release of Valuation Allowance Valuation Allowance established at time of combinations Tax benefits recognized subsequent to the acquisition are applied, in order: Reduce to zero any goodwill related to the acquisition; Reduce to zero other non-current intangible assets related to the acquisition; Reduce income tax expense (Note: FAS 141R ED proposes change) 11a - Rob11a - Rob

59. Ordering of Recognition Generally must be specifically identified and recognized bases on tax return ordering If cannot be identified, then prorate Tax benefit substitution rule (Paragraph 244) Contrast with EITF D-32 relating to stock option windfall deductions 11b - Rob11b - Rob

60. Paragraph 244 Example 11c - Rob11c - Rob

61. Tax Reporting Issues with Non-US Subsidiaries Recording changes in deferred taxes for statutory rate changes in year of enactment Improper netting of jurisdictional deferred tax assets and liabilities Disclosure issues around non-US gross deferreds and valuation allowances APB23 deferred tax liabilities where not permanently reinvested Substantiation of E&P and taxes paid pools for CFCs Adjustment for tax audits - both local and IRS (correlative adjs) Consideration of locally reported �inside basis� DTLs in deemed paid credit computation 4 - Rusty4 - Rusty

62. Intraperiod Allocation � Paragraph 140 8 - Jeff8 - Jeff

63. APB 23 Background Not an election Exception applies if the specific facts and circumstances warrant Based on a company�s ability and intent to control the reversal of a taxable temporary difference 12a - Rob12a - Rob

64. APB 23 � �Ability� Requirement Management representation must be supported by the facts and circumstances (APB 23 � 8) Financial needs of parent, and of the sub Remittance restrictions (legal, foreign jurisdiction) Tax consequences of the remittance Changes in facts and circumstances permit companies to justify a change in their APB 23 position with respect to applying the indefinite reversal criteria. 12b - Rob12b - Rob

65. APB 23: Management Representation Evidence of specific plans for reinvestment which demonstrate that remittance of the earnings will be postponed indefinitely Past experience considered Plans for future operations and remittances considered Indefinite (5-7 years is common) Can make different representations for different foreign subsidiaries 12e - Rob 12e - Rob

66. APB 23 - Documentation APB 23 contains a presumption that all earnings will be distributed to the ultimate corporate shareholder unless �clear plans� exist that demonstrate reinvestment Support should be documented (auditors, shareholders, SEC) Compliance With Sarbanes � Oxley Section 404 requirements 12f - Rob 12f - Rob

67. APB 23 Disclosure The following information is disclosed whenever a deferred tax liability is not recognized: A description of the types of temporary differences for which a deferred tax liability has not been recognized and the types of events that would cause those temporary differences to become taxable The cumulative amount of each type of temporary difference The amount of unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries or a statement that determination is not practicable 12g - Rob 12g - Rob