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Analyzing the Tax Rate
ACTG 6920Session 3Professor Kile
Analyzing the Tax Rate
The Tax Expense reported on the incomestatement is a taxable amount based uponearnings as measured by GAAP.
The amount of taxes actually paid is a taxable amount based upon earnings as measured by Tax Code.
Analyzing the Tax Rate
The amount of taxes paid on the incomestatement is a GAAP (financial reporting)Measure- not the actual amount of taxesPaid.
Analyzing the Tax Rate
To determine the amount of taxes actually Paid, one must find “Current Tax” in theFootnotes.
Examples:Pacific Sunwear of CaliforniaBuckle
Creating a Tax Worksheet
1. Open the tax spreadsheet;2. Create a table containing the marginal tax rates
Federal = 35%Additional State Taxes = ( + )Foreign Differential * = ( - )
3. Create a table containing the effective tax rates4. Create a table containing the actual tax rates
Calculating the Tax RateActual (Current)
2012 2011 2010
Current federal 590 497 561Current state 60 60 69Deferred federal (66) 124 35Deferred state (9) 11 3
$575 $692 $668
Calculating the Tax Rate
Effective Tax Rate =Tax Expense divided byEarnings Before TaxExample: KohlsIncome before income taxes 1,561 1,859 1,788Provision for income taxes 575 692 668Net income 986 1,167 1,120
Calculating the Tax Rate
Problems with using the Effective Rate
Examples: Citigroup (2006 – 2008)
Calculating the Tax Rate - Default
2012 2011 2010Provision at statutory rate 35.0% 35.0% 35.0%State income taxes 2.2 2.7 2.7Tax-exempt interest income (0.1) — (0.3)Federal HIRE Act tax credit — (0.4) —Other Federal tax credits (0.3) (0.1) —Provision for income taxes 36.8% 37.2% 37.4%
Calculating the Tax Rate
An alternative is to consider the defaultRates.Example:Phillips-Van HeusenBut, sometimes these are given in AmountsExamples:Citi TrendsPacific Sunwear of California
Indirect Evidence – Tax Footnote
Tax Deferred Asset:Created when IRS>GAAP
Tax Deferred Liability:Created when GAAP>IRS
Big Bath – Tax Valuation
A build up of Deferred Tax Liabilitymay signal a revenue or earningsquality issue.
Indirect Evidence of Revenue Quality
Build-up of Tax Deferred Liabilities:
Over time, GAAP income & IRS income should mostly balance out and thus, track each other.
Build-ups of Tax Liabilities could indicate that companies are accelerating the recognition of revenue or are managing earnings upward.
Indirect Evidence of Revenue Quality
Such build-ups in Tax Liabilities occurred During the 1990s, prior to the market “corrections” of 2000 – 2002 and during the years prior to the 2008 market decline. According to CFO Magazine, the gap between the two numbers rose from
Negligible in 1992to $93 billion in 1996To $160 billion in 1998 (1/4th of reported income)
Big Bath – Tax Valuation
A build up of Deferred Tax Assetsmay signal a big bath
Big Bath – Tax Valuation
A Tax Valuation Allowance occurswhen asset realization is doubtful.(remember that “assets are expenses waiting to happen”).
When the valuation is removed It becomes an immediate expense.EXAMPLES: Men’s Wearhouse, General Motors, Citigroup
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