Accounting for Income Taxes DETROIT TEI CONFERENCE JUNE 5, 2013

1. Accounting for Income Taxes • DETROIT TEI CONFERENCE • JUNE 5, 2013

2. Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials.The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

3. Tax Executives Institute, Inc. – Detroit ChapterAccounting for Income Taxes ForumJune 5, 2013 Presenters: KPMG LLP Ashby Corum, Jenna Summer,MC: Michelle Weil

4. Accounting for Income Taxes - Overview

5. Overview of Accounting for Income Taxes Current Tax Provision Deferred Tax Provision +/- = Income Tax Provision Total Income Tax Expense/Benefit Current Income Tax Expense/Benefit Deferred Income Tax Expense/Benefit Based on Tax Return (Amount owed to Government) Based on Change in Deferred Tax Assets and Liabilities (BOY to EOY) 5

6. Current Tax Provision Pretax financial (book) income + Nondeductible items - Nontaxable items +/- Temporary differences Current taxable income x Enacted tax rate Current income tax expense

7. Permanent Differences • Common examples (not all inclusive) • Items recognized for financial reporting purposes but not for tax purposes: • Interest received on state and municipal obligations • Life insurance premiums and proceeds • Compensation expense for certain employee stock options • Fines and expenses from violations of law • 50% of meals & entertainment expenses • Items recognized for tax purposes but not for financial reporting purposes: • Deduction for dividends received from domestic corporations (generally 80% of these dividends are non-taxable) • “Percentage depletion” of natural resources in excess of their cost

8. Temporary Differences – Example 1 Deductible Taxable Deductible • Allowance for uncollectible accounts receivable • If • Not allowed for tax purposes until charged-off

9. Temporary Differences – Example 2 Taxable Taxable Deductible • Property, plant, and equipment • If • Straight line depreciation method for books and • accelerated depreciation method for tax return • (NBV exceeds NTV)

10. Temporary Differences – Example 3 Deductible Taxable Deductible • Property, plant, and equipment • If • Impairment recognized in books on assets not disposed

11. Temporary Differences – Example 4 Taxable Taxable Deductible • Property, plant, and equipment • If • Recorded at FV and FV > original cost

12. Temporary Differences – Example 5 Deductible Taxable Deductible • Accrued compensation • If • Such accruals are not deductible for tax purposes until paid

13. Temporary Differences – Example 6 Deductible Taxable Deductible • Deferred revenue • If • Can’t be deferred for tax purposes

14. Temporary Differences – Specific Application

15. Recognition of Deferred Taxes • Deferred tax assets and liabilities are measured by applying to the corresponding deductible or taxable temporary differences the applicable enacted tax rate and provisions of the enacted tax law.

16. Measurement of Deferred Taxes Basic roll-forward schedule of deferred taxes

17. Balance Sheet Presentation

18. Tax Rate Reconciliation • Temporary differences do not result in reconciling items in this analysis.

19. Accounting for Uncertainty in Income Taxes

20. Definition of a Tax Position • ASC 740-10-20 defines a tax position as: “A position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods.”

21. Definition of a Tax Position (continued) Possible tax positions Deduction taken on the tax return for a current expenditure that the taxing authority may assert should be capitalized/amortized over future periods; Acceleration of a deduction that otherwise would be available in a later period; Decision that certain income is nontaxable under the tax law; Determination of the amount of deductions/taxable income to report on intercompany transfers between entities in different tax jurisdictions; Calculation of the amount of a research and experimentation credit; Determination whether a spin-off transaction is taxable or nontaxable; Determination as to whether an entity qualifies as a REIT or regulated investment company; Determination whether an entity is subject to tax in a jurisdiction (Note: This does not represent a complete list)

22. Accounting for Uncertainty in Income Taxes • ASC Topic 740-10: • Establishes the threshold for recognizing the benefits of tax-return positions in the financial statements as “more likely than not” to be sustained by the taxing authority • Prescribes a measurement methodology for those positions meeting the recognition threshold as largest amount of benefit that is greater than 50% likely of being sustained • Does not require a specific manner for the analysis related to either recognition or measurement

23. Accounting for Uncertainty in Income Taxes Eight Steps 23

24. Categories of Identified Tax Positions Evaluation of the tax position may be grouped into the following categories:

25. Accounting for Uncertainty in Income Taxes Eight Steps 25

26. Unit of Account • The unit of account used to identify an individual tax position is a matter of judgment that should consider: • Manner in which an entity prepares and supports its income tax returns (disaggregation should be consistent); • Approach to be taken by taxing authorities • It may be appropriate to define the unit of account at the lowest level necessary to ensure that benefits with widely varying levels of uncertainty or issues that may be treated differently under the tax law are not included in the same unit of account

27. Scenario: Unit of Account Example • Pharma Corp., a pharmaceutical company, claims a research and experimentation credit for a qualifying research project that contains both expenditures that are highly certain and expenditures that could be disallowed. • Based on this scenario, what is a possible unit of account and what is the possible impact to recognition of the benefit? • Providing the project qualifies, it may be appropriate to separate the expenditures into two units of account, especially if likely to be reviewed by the taxing authority in that manner

28. Accounting for Uncertainty in Income Taxes Eight Steps 28

29. Recognition In determining whether it is MLTN that a tax position will be sustained, an entity must assume the taxing authority will examine the position and have full knowledge of all relevant information

30. Recognition: Administrative Practices and Precedents • For example, the tax law in ABC Inc.’s particular jurisdiction does not establish a capitalization threshold below which fixed-asset expenditures may be considered deductions in the period they are incurred. • Based on widely understood precedence, the taxing authority has not historically disallowed current deductions for individual fixed-asset purchases below a specific dollar amount. • Based on this scenario, is it possible for this tax position meet the MLTN recognition threshold? An entity may be able to conclude that a tax position meets the MLTN threshold based on administrative practices and precedents even though the tax position may be considered technical violations of the tax law

31. Recognition: Administrative Practices and Precedents (continued) • For example, the tax law in ABC Inc.’s particular jurisdiction does not establish a capitalization threshold below which fixed-asset expenditures may be considered deductions in the period they are incurred. • Based on previous experience, the taxing authority has not historically disallowed current deductions for individual fixed-asset purchases below a specific dollar amount. • Based on this scenario, is it possible for this tax position meet the MLTN recognition threshold? Yes, because it is well understood by taxpayers that the taxing authority has not historically disallowed current deductions for individual fixed-asset purchases below a specific dollar amount.

32. Accounting for Uncertainty in Income Taxes Eight Steps 32

33. Measurement The measurement process is applied only to tax positions that meet the MLTN recognition threshold. The benefit recognized for a tax position meeting the MLTN criterion is measured based on the largest benefit that is more than 50% likely to be realized. When multiple settlement outcomes are possible, management should evaluate the likelihood of the largest possible benefit that is more than 50% likely to be realized Aggregation or offset with indirect effects not appropriate

34. Measurement (continued) • Measurement should consider all facts (positive and negative) as of the reporting date including: • History of negotiating and settling similar positions with the taxing authority (the entity’s history or available history of other entities) • Guidance from appropriately qualified tax advisors • Other available information • Must assume taxing authority has full knowledge of position

35. Measurement: Scenario • Based on this scenario, what is the amount of tax benefit that should be recognized? An entity has determined that a tax position resulting in a benefit of $100 qualifies for recognition and should be measured. The entity has considered the amounts and probabilities of the possible estimated outcomes as follows:

36. Measurement: Scenario Debrief • $60 is the amount of tax benefit that would be recognized in the because it represents the largest cumulative amount of benefit that is MLTN. An entity has determined that a tax position resulting in a benefit of $100 qualifies for recognition and should be measured. The entity has considered the amounts and probabilities of the possible estimated outcomes as follows:

37. Measurement: Availability of Information

38. Availability of Information

39. Availability of Information: Example Background Lucky Charms, Inc. (LC), a national jewelry distributor, has employment agreements with certain executives that allow for payment of incentive compensation upon attainment of a goal or voluntary retirement. LC believes that these compensation arrangements are fully deductible and LC has recognized the tax benefit related to the executive compensation accruals.

40. Availability of Information: Example 1 • Based on this scenario, what is the impact to the financial statements assuming a January 31st reporting date? On January 25, the IRS held in a Private Letter Ruling (PLR) that certain provisions in an individual's employment agreement prevented incentive compensation from being treated as performance based compensation. February 21, the IRS released a separate Revenue Ruling that supports the PLR. However, the Revenue Ruling states it will not disallow a deduction for compensation arrangements similar to that of LC, Inc.

41. Availability of Information: Example 2 • Based on this scenario, what is the impact to the financial statements assuming a February 28th reporting date? On January 25, the IRS held in a Private Letter Ruling (PLR) that certain provisions in an individual's employment agreement prevented incentive compensation from being treated as performance based compensation. February 21, the IRS released a separate Revenue Ruling that supports the PLR. However, the Revenue Ruling states it will not disallow a deduction for compensation arrangements similar to that of LC, Inc.

42. Measurement: Reevaluation of the Tax Position

43. Reevaluation of the Tax Position • What new information may result in derecognition of a previously recognized tax position, recognition a previously unrecognized tax position, or remeasurement a previously recognized tax position? • New information about the recognition and measurement of a tax position should trigger a reevaluation. • The reevaluation could lead an entity to: • derecognize a previously recognized tax position, • recognize a previously unrecognized tax position, or • remeasure a previously recognized tax position

44. Reevaluation of the Tax Position (continued) • Consider whether new information for an existing tax position at the reporting date triggers reevaluation of the measurement of a previously recognized tax position. • New information may include, but is not limited to: • changes in the tax law, • developments in relevant case law, • interactions with the taxing authority, and • recent rulings by the taxing authority.

45. Derecognition of Tax Positions

46. Subsequent Recognition

47. Settlement

48. Settlement (continued)

49. Interim Period Changes in Judgment Changes in judgment that result in subsequent recognition, derecognition, or remeasurement of tax positions taken in prior annual periods should be recognized entirely in the interim period in which the change in judgment occurs as a discrete item Changes to positions taken in an earlier interim period within that same annual period are reflected as adjustments to the annual effective rate

50. Measurement: Timing Uncertainties