Income Tax Accounting Policy

The provision for income taxes is determined using the asset and liability approach taking into account guidance related to uncertain tax positions. Tax laws require items to be included in tax filings at different times than the items are reflected in the financial statements. A current liability is recognized for the estimated taxes payable for the current year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes are adjusted for enacted changes in tax rates and tax laws. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

Source: Caterpillar Inc., Annual Report

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Income Tax Expense (Benefit)

Caterpillar Inc., income tax expense (benefit), continuing operations

USD $ in millions

 
12 months ended Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009
U.S. 407  971  750  247  (443)
Non-U.S. 805  1,250  1,014  645  350 
State (U.S.) 33  56  72  44  (13)
Current tax provision (benefit) 1,245  2,277  1,836  936  (106)
U.S. 79  332  103 
Non-U.S. (7) (89) (92) (75) (149)
State (U.S.) (26) (16)
Deferred tax provision (benefit) 74  251  (116) 32  (164)
Provision (benefit) for income taxes 1,319  2,528  1,720  968  (270)

Source: Based on data from Caterpillar Inc. Annual Reports

Item Description The company
Current tax provision (benefit) The component of income tax expense for the period representing amounts of income taxes paid or payable (or refundable) for the period for all income tax obligations as determined by applying the provisions of relevant enacted tax laws to relevant amounts of taxable income (loss) from continuing operations. Caterpillar Inc.'s current tax provision (benefit) increased from 2011 to 2012 but then declined significantly from 2012 to 2013.
Deferred tax provision (benefit) The component of income tax expense for the period representing the net change in the entity's deferred tax assets and liabilities pertaining to continuing operations. Caterpillar Inc.'s deferred tax provision (benefit) increased from 2011 to 2012 but then slightly declined from 2012 to 2013.
Provision (benefit) for income taxes The sum of the current income tax expense (benefit) and the deferred income tax expense (benefit) pertaining to pretax income (loss) from continuing operations; income tax expense (benefit) may include interest and penalties on tax uncertainties based on the entity's accounting policy. Caterpillar Inc.'s provision (benefit) for income taxes increased from 2011 to 2012 but then declined significantly from 2012 to 2013.

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Effective Income Tax Rate (EITR)

Caterpillar Inc., effective income tax rate (EITR) reconciliation

 
Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009
Taxes at U.S. statutory rate 35.00% 35.00% 35.00% 35.00% 35.00%
Non-U.S. subsidiaries taxed at other than 35% -5.20% -4.20% -6.90% -9.00% -46.00%
State and local taxes, net of federal 0.40% 0.70% 0.40% 0.70% -3.30%
Interest and penalties, net of tax 0.10% 0.30% 0.40% 0.40% 3.50%
U.S. research and production incentives -1.80% -1.00% -2.30% -1.50% -8.20%
Other, net –% -0.30% -0.10% -0.60% -5.10%
Increases (decreases) in taxes -6.50% -4.50% -8.50% -10.00% -59.10%
Prior year tax and interest adjustments -1.10% -3.70% 0.60% -0.90% -23.40%
Nondeductible goodwill –% 3.90% 0.50% –% –%
Release of valuation allowances –% –% -0.30% -0.70% –%
Non-U.S. earnings reinvestment changes –% –% -1.70% –% –%
Tax law change -1.70% –% –% 2.40% –%
Effective rate 25.70% 30.70% 25.60% 25.80% -47.50%

Source: Based on data from Caterpillar Inc. Annual Reports

Item Description The company
Effective rate A ratio calculated by dividing the reported amount of income tax expense attributable to continuing operations for the period by GAAP-basis pretax income from continuing operations. Caterpillar Inc.'s effective rate increased from 2011 to 2012 but then slightly declined from 2012 to 2013 not reaching 2011 level.

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Components of Deferred Tax Assets and Liabilities

Caterpillar Inc., components of deferred tax assets and liabilities

USD $ in millions

 
Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009
Pension 903  2,100  2,130  1,065  1,207 
Postemployment benefits other than pensions 1,435  1,678  1,622  1,501  1,362 
Tax carryforwards 760  663  821  1,117  1,185 
Warranty reserves 313  358  338  253  243 
Stock-based compensation 320  281  232  215  182 
Inventory 112  195  372  269  229 
Allowance for credit losses 184  170  131  111  102 
Post sale discounts 146  141  141  142  112 
Deferred compensation 126  110  102  106  95 
Other, net 524  491  645  394  396 
Deferred income tax assets, gross 4,823  6,187  6,534  5,173  5,113 
Valuation allowance for deferred tax assets (745) (586) (470) (412) (475)
Deferred income tax assets 4,078  5,601  6,064  4,761  4,638 
Capital and intangible assets (2,815) (2,759) (2,743) (1,423) (1,185)
Bond discount (240) (249)
Translation (133) (173) (193) (169) (96)
Undistributed profits of non-U.S. subsidiaries (90) (128) (215)
Deferred income tax liabilities (3,278) (3,309) (3,151) (1,592) (1,281)
Deferred income taxes, net 800  2,292  2,913  3,169  3,357 

Source: Based on data from Caterpillar Inc. Annual Reports

Item Description The company
Deferred income tax assets, gross The sum of the tax effects as of the balance sheet date of the amounts of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws (before the valuation allowance, if any, to reduce such sum amount to net realizable value). Includes any tax benefit realized in deferred tax assets for significant impacts of tax planning strategies. Caterpillar Inc.'s deferred income tax assets, gross declined from 2011 to 2012 and from 2012 to 2013.
Deferred income tax assets The aggregate tax effects as of the balance sheet date of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws; net of deducting the allocated valuation allowance, if any, to reduce such amount to net realizable value. Caterpillar Inc.'s deferred income tax assets declined from 2011 to 2012 and from 2012 to 2013.
Deferred income taxes, net For entities that net deferred tax assets and tax liabilities, represents the unclassified net amount of deferred tax assets and liabilities as of the balance sheet date, which result from applying the applicable enacted tax rate to net temporary differences and carryforwards pertaining to assets or liabilities. A temporary difference is a difference between the tax basis of an asset or liability and its carrying amount in the financial statements prepared in accordance with generally accepted accounting principles that will reverse in ensuing periods. Caterpillar Inc.'s deferred income taxes, net declined from 2011 to 2012 and from 2012 to 2013.

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Deferred Tax Assets and Liabilities, Classification

Caterpillar Inc., deferred tax assets and liabilities, classification

USD $ in millions

 

Source: Based on data from Caterpillar Inc. Annual Reports

Item Description The company
Current deferred income tax assets (included in deferred and refundable income taxes) The current portion of the aggregate tax effects as of the balance sheet date of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws; after deducting the allocated valuation allowance, if any, to reduce such amount to net realizable value. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. An unrecognized tax benefit that is directly related to a position taken in a tax year that results in a net operating loss carryforward should be presented as a reduction of the related deferred tax asset. Caterpillar Inc.'s current deferred income tax assets (included in deferred and refundable income taxes) declined from 2011 to 2012 and from 2012 to 2013.
Noncurrent deferred income tax assets (included in noncurrent deferred and refundable income taxes) The noncurrent portion as of the balance sheet date of the aggregate carrying amount of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws; after the valuation allowance, if any, to reduce such amount to net realizable value. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. Caterpillar Inc.'s noncurrent deferred income tax assets (included in noncurrent deferred and refundable income taxes) declined from 2011 to 2012 and from 2012 to 2013.
Current deferred tax liabilities (included in other current liabilities) Represents the current portion of deferred tax liabilities, which result from applying the applicable tax rate to net taxable temporary differences pertaining to each jurisdiction to which the entity is obligated to pay income tax. A current taxable temporary difference is a difference between the tax basis and the carrying amount of a current asset or liability in the financial statements prepared in accordance with generally accepted accounting principles. In a classified statement of financial position, an enterprise shall separate deferred tax liabilities and assets into a current amount and a noncurrent amount. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. Caterpillar Inc.'s current deferred tax liabilities (included in other current liabilities) declined from 2011 to 2012 but then increased from 2012 to 2013 exceeding 2011 level.
Noncurrent deferred tax liabilities (included in other liabilities) Represents the noncurrent portion of deferred tax liabilities, which result from applying the applicable tax rate to net taxable temporary differences pertaining to each jurisdiction to which the entity is obligated to pay income tax. A noncurrent taxable temporary difference is a difference between the tax basis and the carrying amount of a noncurrent asset or liability in the financial statements prepared in accordance with generally accepted accounting principles. In a classified statement of financial position, an enterprise shall separate deferred tax liabilities and assets into a current amount and a noncurrent amount. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. Caterpillar Inc.'s noncurrent deferred tax liabilities (included in other liabilities) declined from 2011 to 2012 and from 2012 to 2013.

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Analyst Adjustments: Removal of Deferred Taxes

Caterpillar Inc., adjustments to financial data

USD $ in millions

 
Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009
Adjustment to Current Assets
Current assets (as reported) 38,335  42,524  38,128  31,810  26,789 
Less: Current deferred tax assets, net 877  979  1,384  824  802 
Current assets (adjusted) 37,458  41,545  36,744  30,986  25,987 
Adjustment to Total Assets
Total assets (as reported) 84,896  89,356  81,446  64,020  60,038 
Less: Current deferred tax assets, net 877  979  1,384  824  802 
Less: Noncurrent deferred tax assets, net 456  1,863  2,157  2,493  2,704 
Total assets (adjusted) 83,563  86,514  77,905  60,703  56,532 
Adjustment to Current Liabilities
Current liabilities (as reported) 27,297  29,755  28,561  22,020  19,292 
Less: Current deferred tax liabilities, net 86  66  69  11 
Current liabilities (adjusted) 27,211  29,689  28,492  22,013  19,281 
Adjustment to Total Liabilities
Total liabilities (as reported) 64,018  71,774  68,044  52,695  50,738 
Less: Current deferred tax liabilities, net 86  66  69  11 
Less: Noncurrent deferred tax liabilities, net 447  484  559  141  138 
Total liabilities (adjusted) 63,485  71,224  67,416  52,547  50,589 
Adjustment to Equity Attributable To Common Stockholders
Equity attributable to common stockholders (as reported) 20,811  17,532  12,883  10,824  8,740 
Less: Current deferred tax assets, net 877  979  1,384  824  802 
Less: Noncurrent deferred tax assets, net 456  1,863  2,157  2,493  2,704 
Add: Current deferred tax liabilities, net 86  66  69  11 
Add: Noncurrent deferred tax liabilities, net 447  484  559  141  138 
Equity attributable to common stockholders (adjusted) 20,011  15,240  9,970  7,655  5,383 
Adjustment to Profit Attributable To Common Stockholders
Profit attributable to common stockholders (as reported) 3,789  5,681  4,928  2,700  895 
Add: Deferred income tax expense (benefit) 74  251  (116) 32  (164)
Profit attributable to common stockholders (adjusted) 3,863  5,932  4,812  2,732  731 

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Adjusted Ratios: Removal of Deferred Taxes (Summary)

Caterpillar Inc., adjusted ratios

 
Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009
Current Ratio
Reported current ratio 1.40 1.43 1.33 1.44 1.39
Adjusted current ratio 1.38 1.40 1.29 1.41 1.35
Net Profit Margin
Reported net profit margin 7.19% 9.01% 8.59% 6.77% 3.03%
Adjusted net profit margin 7.33% 9.41% 8.38% 6.85% 2.47%
Total Asset Turnover
Reported total asset turnover 0.62 0.71 0.70 0.62 0.49
Adjusted total asset turnover 0.63 0.73 0.74 0.66 0.52
Financial Leverage
Reported financial leverage 4.08 5.10 6.32 5.91 6.87
Adjusted financial leverage 4.18 5.68 7.81 7.93 10.50
Return on Equity (ROE)
Reported ROE 18.21% 32.40% 38.25% 24.94% 10.24%
Adjusted ROE 19.30% 38.92% 48.26% 35.69% 13.58%
Return on Assets (ROA)
Reported ROA 4.46% 6.36% 6.05% 4.22% 1.49%
Adjusted ROA 4.62% 6.86% 6.18% 4.50% 1.29%
Ratio Description The company
Adjusted current ratio A liquidity ratio calculated as adjusted current assets divided by adjusted current liabilities. Caterpillar Inc.'s adjusted current ratio improved from 2011 to 2012 but then slightly deteriorated from 2012 to 2013.
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by total revenue. Caterpillar Inc.'s adjusted net profit margin improved from 2011 to 2012 but then deteriorated significantly from 2012 to 2013.
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Caterpillar Inc.'s adjusted total asset turnover deteriorated from 2011 to 2012 and from 2012 to 2013.
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Caterpillar Inc.'s adjusted financial leverage declined from 2011 to 2012 and from 2012 to 2013.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. Caterpillar Inc.'s adjusted ROE deteriorated from 2011 to 2012 and from 2012 to 2013.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Caterpillar Inc.'s adjusted ROA improved from 2011 to 2012 but then deteriorated significantly from 2012 to 2013.

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Adjusted Current Ratio

 
Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009
As Reported
Current assets (USD $ in millions) 38,335  42,524  38,128  31,810  26,789 
Current liabilities (USD $ in millions) 27,297  29,755  28,561  22,020  19,292 
Current ratio1 1.40 1.43 1.33 1.44 1.39
Adjusted for Deferred Taxes
Adjusted current assets (USD $ in millions) 37,458  41,545  36,744  30,986  25,987 
Adjusted current liabilities (USD $ in millions) 27,211  29,689  28,492  22,013  19,281 
Adjusted current ratio2 1.38 1.40 1.29 1.41 1.35

2013 Calculations

1 Current ratio = Current assets ÷ Current liabilities
= 38,335 ÷ 27,297 = 1.40

2 Adjusted current ratio = Adjusted current assets ÷ Adjusted current liabilities
= 37,458 ÷ 27,211 = 1.38

Ratio Description The company
Adjusted current ratio A liquidity ratio calculated as adjusted current assets divided by adjusted current liabilities. Caterpillar Inc.'s adjusted current ratio improved from 2011 to 2012 but then slightly deteriorated from 2012 to 2013.

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Adjusted Net Profit Margin

 
Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009
As Reported
Profit attributable to common stockholders (USD $ in millions) 3,789  5,681  4,928  2,700  895 
Sales of Machinery and Power Systems (USD $ in millions) 52,694  63,068  57,392  39,867  29,540 
Net profit margin1 7.19% 9.01% 8.59% 6.77% 3.03%
Adjusted for Deferred Taxes
Adjusted profit attributable to common stockholders (USD $ in millions) 3,863  5,932  4,812  2,732  731 
Sales of Machinery and Power Systems (USD $ in millions) 52,694  63,068  57,392  39,867  29,540 
Adjusted net profit margin2 7.33% 9.41% 8.38% 6.85% 2.47%

2013 Calculations

1 Net profit margin = 100 × Profit attributable to common stockholders ÷ Sales of Machinery and Power Systems
= 100 × 3,789 ÷ 52,694 = 7.19%

2 Adjusted net profit margin = 100 × Adjusted profit attributable to common stockholders ÷ Sales of Machinery and Power Systems
= 100 × 3,863 ÷ 52,694 = 7.33%

Ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by total revenue. Caterpillar Inc.'s adjusted net profit margin improved from 2011 to 2012 but then deteriorated significantly from 2012 to 2013.

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Adjusted Total Asset Turnover

 
Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009
As Reported
Sales of Machinery and Power Systems (USD $ in millions) 52,694  63,068  57,392  39,867  29,540 
Total assets (USD $ in millions) 84,896  89,356  81,446  64,020  60,038 
Total asset turnover1 0.62 0.71 0.70 0.62 0.49
Adjusted for Deferred Taxes
Sales of Machinery and Power Systems (USD $ in millions) 52,694  63,068  57,392  39,867  29,540 
Adjusted total assets (USD $ in millions) 83,563  86,514  77,905  60,703  56,532 
Adjusted total asset turnover2 0.63 0.73 0.74 0.66 0.52

2013 Calculations

1 Total asset turnover = Sales of Machinery and Power Systems ÷ Total assets
= 52,694 ÷ 84,896 = 0.62

2 Adjusted total asset turnover = Sales of Machinery and Power Systems ÷ Adjusted total assets
= 52,694 ÷ 83,563 = 0.63

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Caterpillar Inc.'s adjusted total asset turnover deteriorated from 2011 to 2012 and from 2012 to 2013.

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Adjusted Financial Leverage

 
Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009
As Reported
Total assets (USD $ in millions) 84,896  89,356  81,446  64,020  60,038 
Equity attributable to common stockholders (USD $ in millions) 20,811  17,532  12,883  10,824  8,740 
Financial leverage1 4.08 5.10 6.32 5.91 6.87
Adjusted for Deferred Taxes
Adjusted total assets (USD $ in millions) 83,563  86,514  77,905  60,703  56,532 
Adjusted equity attributable to common stockholders (USD $ in millions) 20,011  15,240  9,970  7,655  5,383 
Adjusted financial leverage2 4.18 5.68 7.81 7.93 10.50

2013 Calculations

1 Financial leverage = Total assets ÷ Equity attributable to common stockholders
= 84,896 ÷ 20,811 = 4.08

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted equity attributable to common stockholders
= 83,563 ÷ 20,011 = 4.18

Ratio Description The company
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Caterpillar Inc.'s adjusted financial leverage declined from 2011 to 2012 and from 2012 to 2013.

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Adjusted Return On Equity (ROE)

 
Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009
As Reported
Profit attributable to common stockholders (USD $ in millions) 3,789  5,681  4,928  2,700  895 
Equity attributable to common stockholders (USD $ in millions) 20,811  17,532  12,883  10,824  8,740 
ROE1 18.21% 32.40% 38.25% 24.94% 10.24%
Adjusted for Deferred Taxes
Adjusted profit attributable to common stockholders (USD $ in millions) 3,863  5,932  4,812  2,732  731 
Adjusted equity attributable to common stockholders (USD $ in millions) 20,011  15,240  9,970  7,655  5,383 
Adjusted ROE2 19.30% 38.92% 48.26% 35.69% 13.58%

2013 Calculations

1 ROE = 100 × Profit attributable to common stockholders ÷ Equity attributable to common stockholders
= 100 × 3,789 ÷ 20,811 = 18.21%

2 Adjusted ROE = 100 × Adjusted profit attributable to common stockholders ÷ Adjusted equity attributable to common stockholders
= 100 × 3,863 ÷ 20,011 = 19.30%

Ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. Caterpillar Inc.'s adjusted ROE deteriorated from 2011 to 2012 and from 2012 to 2013.

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Adjusted Return On Assets (ROA)

 
Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009
As Reported
Profit attributable to common stockholders (USD $ in millions) 3,789  5,681  4,928  2,700  895 
Total assets (USD $ in millions) 84,896  89,356  81,446  64,020  60,038 
ROA1 4.46% 6.36% 6.05% 4.22% 1.49%
Adjusted for Deferred Taxes
Adjusted profit attributable to common stockholders (USD $ in millions) 3,863  5,932  4,812  2,732  731 
Adjusted total assets (USD $ in millions) 83,563  86,514  77,905  60,703  56,532 
Adjusted ROA2 4.62% 6.86% 6.18% 4.50% 1.29%

2013 Calculations

1 ROA = 100 × Profit attributable to common stockholders ÷ Total assets
= 100 × 3,789 ÷ 84,896 = 4.46%

2 Adjusted ROA = 100 × Adjusted profit attributable to common stockholders ÷ Adjusted total assets
= 100 × 3,863 ÷ 83,563 = 4.62%

Ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Caterpillar Inc.'s adjusted ROA improved from 2011 to 2012 but then deteriorated significantly from 2012 to 2013.

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