Microsoft Excel LibreOffice Calc

Facebook Inc. (NASDAQ:FB)

Analysis of Income Taxes

Advanced level

Accounting Policy on Income Taxes

Facebook is subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining Facebook’s provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws.

Facebook records a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, Facebook recognizes deferred income tax assets and liabilities for the expected future consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as for loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. Facebook recognizes the deferred income tax effects of a change in tax rates in the period of the enactment.

Facebook records a valuation allowance to reduce the deferred tax assets to the net amount that Facebook believes is more likely than not to be realized. Facebook considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance.

Facebook recognizes tax benefits from uncertain tax positions only if Facebook believes that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. These uncertain tax positions include Facebook’s estimates for transfer pricing that have been developed based upon analyses of appropriate arms-length prices. Similarly, Facebook’s estimates related to uncertain tax positions concerning research tax credits are based on an assessment of whether the available documentation corroborating the nature of the activities supporting the tax credits will be sufficient. Although Facebook believes that Facebook has adequately reserved for the uncertain tax positions (including net interest and penalties), Facebook can provide no assurance that the final tax outcome of these matters will not be materially different. Facebook makes adjustments to these reserves in accordance with the income tax guidance when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on Facebook’s financial condition and operating results.

Source: 10-K (filing date: 2020-01-30).

Income Tax Expense (Benefit)

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

US$ in millions

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12 months ended Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Federal 4,321  1,747  4,455  2,384  3,012 
State 565  176  190  179  183 
Foreign 1,481  1,031  389  195  123 
Current tax expense 6,367  2,954  5,034  2,758  3,318 
Federal (39) 316  (296) (414) (800)
State 19  34  (33) (18) (17)
Foreign (20) (55) (45) (25) 5 
Deferred tax expense (benefits) (40) 295  (374) (457) (812)
Provision for income taxes 6,327  3,249  4,660  2,301  2,506 

Based on: 10-K (filing date: 2020-01-30), 10-K (filing date: 2019-01-31), 10-K (filing date: 2018-02-01), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-01-28).

Item Description The company
Current tax expense Amount of current income tax expense (benefit) pertaining to taxable income (loss) from continuing operations. Facebook Inc.’s current tax expense decreased from 2017 to 2018 but then increased from 2018 to 2019 exceeding 2017 level.
Deferred tax expense (benefits) Amount of deferred income tax expense (benefit) pertaining to income (loss) from continuing operations. Facebook Inc.’s deferred tax expense (benefits) increased from 2017 to 2018 but then slightly decreased from 2018 to 2019 not reaching 2017 level.
Provision for income taxes Amount of current income tax expense (benefit) and deferred income tax expense (benefit) pertaining to continuing operations. Facebook Inc.’s provision for income taxes decreased from 2017 to 2018 but then increased from 2018 to 2019 exceeding 2017 level.

Effective Income Tax Rate (EITR)

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

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Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
U.S. federal statutory income tax rate 21.00% 21.00% 35.00% 35.00% 35.00%
State income taxes, net of federal benefit 1.80% 0.70% 0.60% 1.00% 2.00%
Research tax credits -0.80% -1.00% -0.90% -0.70% -1.40%
Share-based compensation 4.50% 0.30% 0.40% 1.00% 2.20%
Excess tax benefits related to share-based compensation -0.70% -2.60% -5.80% -7.00% 0.00%
Effect of non-U.S. operations -5.80% -5.90% -18.60% -12.80% -0.90%
Non-deductible FTC settlement accrual 4.50% 0.00% 0.00% 0.00% 0.00%
Other 1.00% 0.30% 0.90% 1.90% 3.50%
Effective tax rate, before effect of U.S. tax law change 25.50% 12.80% 11.60% 18.40% 40.40%
Effect of U.S. tax law change 0.00% 0.00% 11.00% 0.00% 0.00%
Effective tax rate 25.50% 12.80% 22.60% 18.40% 40.40%

Based on: 10-K (filing date: 2020-01-30), 10-K (filing date: 2019-01-31), 10-K (filing date: 2018-02-01), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-01-28).

Item Description The company
Effective tax rate, before effect of U.S. tax law change Percentage of current income tax expense (benefit) and deferred income tax expense (benefit) pertaining to continuing operations. Facebook Inc.’s effective tax rate, before effect of U.S. tax law change increased from 2017 to 2018 and from 2018 to 2019.

Components of Deferred Tax Assets and Liabilities

Facebook Inc., components of deferred tax assets and liabilities

US$ in millions

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Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Net operating loss carryforward 2,051  1,825  1,300  1,252  476 
Tax credit carryforward 1,333  668  509  268  297 
Share-based compensation 135  270  385  684  529 
Accrued expenses and other liabilities 798  487  381  339  239 
Lease liabilities 1,999  —  —  —  — 
Other 149  153  131  149  34 
Deferred tax assets 6,465  3,403  2,706  2,692  1,575 
Valuation allowance (1,012) (600) (438) (240) (205)
Deferred tax assets, net of valuation allowance 5,453  2,803  2,268  2,452  1,370 
Depreciation and amortization (2,387) (1,401) (622) (535) (270)
Right-of-use assets (1,910) —  —  —  — 
Purchased intangible assets —  (195) (309) (706) (934)
Deferred taxes on foreign income —  —  (88) (357) (15)
Deferred tax liabilities (4,297) (1,596) (1,019) (1,598) (1,219)
Net deferred tax assets (liabilities) 1,156  1,207  1,249  854  151 

Based on: 10-K (filing date: 2020-01-30), 10-K (filing date: 2019-01-31), 10-K (filing date: 2018-02-01), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-01-28).

Item Description The company
Deferred tax assets Amount before allocation of valuation allowances of deferred tax asset attributable to deductible temporary differences and carryforwards. Facebook Inc.’s deferred tax assets increased from 2017 to 2018 and from 2018 to 2019.
Deferred tax assets, net of valuation allowance Amount after allocation of valuation allowances of deferred tax asset attributable to deductible temporary differences and carryforwards. Facebook Inc.’s deferred tax assets, net of valuation allowance increased from 2017 to 2018 and from 2018 to 2019.
Net deferred tax assets (liabilities) Amount, after allocation of valuation allowances and deferred tax liability, of deferred tax asset attributable to deductible differences and carryforwards, without jurisdictional netting. Facebook Inc.’s net deferred tax assets (liabilities) decreased from 2017 to 2018 and from 2018 to 2019.

Adjustments to Financial Statements: Removal of Deferred Taxes

Facebook Inc., adjustments to financial statements

US$ in millions

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Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Adjustment to Total Liabilities
Total liabilities (as reported) 32,322  13,207  10,177  5,767  5,189 
Less: Noncurrent deferred tax liabilities, net 1,039  673  50  —  — 
Total liabilities (adjusted) 31,283  12,534  10,127  5,767  5,189 
Adjustment to Stockholders’ Equity
Stockholders’ equity (as reported) 101,054  84,127  74,347  59,194  44,218 
Less: Net deferred tax assets (liabilities) 1,156  1,207  1,249  854  151 
Stockholders’ equity (adjusted) 99,898  82,920  73,098  58,340  44,067 
Adjustment to Net Income
Net income (as reported) 18,485  22,112  15,934  10,217  3,688 
Add: Deferred income tax expense (benefit) (40) 295  (374) (457) (812)
Net income (adjusted) 18,445  22,407  15,560  9,760  2,876 

Based on: 10-K (filing date: 2020-01-30), 10-K (filing date: 2019-01-31), 10-K (filing date: 2018-02-01), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-01-28).

Facebook Inc., Financial Data: Reported vs. Adjusted

Adjusted Financial Ratios: Removal of Deferred Taxes (Summary)

Facebook Inc., adjusted financial ratios

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Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Net Profit Margin
Reported net profit margin 26.15% 39.60% 39.20% 36.97% 20.57%
Adjusted net profit margin 26.09% 40.13% 38.28% 35.31% 16.04%
Financial Leverage
Reported financial leverage 1.32 1.16 1.14 1.10 1.12
Adjusted financial leverage 1.34 1.17 1.16 1.11 1.12
Return on Equity (ROE)
Reported ROE 18.29% 26.28% 21.43% 17.26% 8.34%
Adjusted ROE 18.46% 27.02% 21.29% 16.73% 6.53%
Return on Assets (ROA)
Reported ROA 13.86% 22.72% 18.85% 15.73% 7.46%
Adjusted ROA 13.83% 23.02% 18.41% 15.02% 5.82%

Based on: 10-K (filing date: 2020-01-30), 10-K (filing date: 2019-01-31), 10-K (filing date: 2018-02-01), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-01-28).

Financial ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by total revenue. Facebook Inc.’s adjusted net profit margin ratio improved from 2017 to 2018 but then deteriorated significantly from 2018 to 2019.
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.		 Facebook Inc.’s adjusted financial leverage ratio increased from 2017 to 2018 and from 2018 to 2019.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. Facebook Inc.’s adjusted ROE improved from 2017 to 2018 but then deteriorated significantly from 2018 to 2019.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Facebook Inc.’s adjusted ROA improved from 2017 to 2018 but then deteriorated significantly from 2018 to 2019.

Facebook Inc., Financial Ratios: Reported vs. Adjusted

Adjusted Net Profit Margin

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Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
As Reported
Selected Financial Data (US$ in millions)
Net income 18,485  22,112  15,934  10,217  3,688 
Revenue 70,697  55,838  40,653  27,638  17,928 
Profitability Ratio
Net profit margin1 26.15% 39.60% 39.20% 36.97% 20.57%
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted net income 18,445  22,407  15,560  9,760  2,876 
Revenue 70,697  55,838  40,653  27,638  17,928 
Profitability Ratio
Adjusted net profit margin2 26.09% 40.13% 38.28% 35.31% 16.04%

Based on: 10-K (filing date: 2020-01-30), 10-K (filing date: 2019-01-31), 10-K (filing date: 2018-02-01), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-01-28).

2019 Calculations

1 Net profit margin = 100 × Net income ÷ Revenue
= 100 × 18,485 ÷ 70,697 = 26.15%

2 Adjusted net profit margin = 100 × Adjusted net income ÷ Revenue
= 100 × 18,445 ÷ 70,697 = 26.09%

Profitability ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by total revenue. Facebook Inc.’s adjusted net profit margin ratio improved from 2017 to 2018 but then deteriorated significantly from 2018 to 2019.

Adjusted Financial Leverage

Microsoft Excel LibreOffice Calc
Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
As Reported
Selected Financial Data (US$ in millions)
Total assets 133,376  97,334  84,524  64,961  49,407 
Stockholders’ equity 101,054  84,127  74,347  59,194  44,218 
Solvency Ratio
Financial leverage1 1.32 1.16 1.14 1.10 1.12
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Total assets 133,376  97,334  84,524  64,961  49,407 
Adjusted stockholders’ equity 99,898  82,920  73,098  58,340  44,067 
Solvency Ratio
Adjusted financial leverage2 1.34 1.17 1.16 1.11 1.12

Based on: 10-K (filing date: 2020-01-30), 10-K (filing date: 2019-01-31), 10-K (filing date: 2018-02-01), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-01-28).

2019 Calculations

1 Financial leverage = Total assets ÷ Stockholders’ equity
= 133,376 ÷ 101,054 = 1.32

2 Adjusted financial leverage = Total assets ÷ Adjusted stockholders’ equity
= 133,376 ÷ 99,898 = 1.34

Solvency 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.		 Facebook Inc.’s adjusted financial leverage ratio increased from 2017 to 2018 and from 2018 to 2019.

Adjusted Return on Equity (ROE)

Microsoft Excel LibreOffice Calc
Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
As Reported
Selected Financial Data (US$ in millions)
Net income 18,485  22,112  15,934  10,217  3,688 
Stockholders’ equity 101,054  84,127  74,347  59,194  44,218 
Profitability Ratio
ROE1 18.29% 26.28% 21.43% 17.26% 8.34%
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted net income 18,445  22,407  15,560  9,760  2,876 
Adjusted stockholders’ equity 99,898  82,920  73,098  58,340  44,067 
Profitability Ratio
Adjusted ROE2 18.46% 27.02% 21.29% 16.73% 6.53%

Based on: 10-K (filing date: 2020-01-30), 10-K (filing date: 2019-01-31), 10-K (filing date: 2018-02-01), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-01-28).

2019 Calculations

1 ROE = 100 × Net income ÷ Stockholders’ equity
= 100 × 18,485 ÷ 101,054 = 18.29%

2 Adjusted ROE = 100 × Adjusted net income ÷ Adjusted stockholders’ equity
= 100 × 18,445 ÷ 99,898 = 18.46%

Profitability ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. Facebook Inc.’s adjusted ROE improved from 2017 to 2018 but then deteriorated significantly from 2018 to 2019.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
As Reported
Selected Financial Data (US$ in millions)
Net income 18,485  22,112  15,934  10,217  3,688 
Total assets 133,376  97,334  84,524  64,961  49,407 
Profitability Ratio
ROA1 13.86% 22.72% 18.85% 15.73% 7.46%
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted net income 18,445  22,407  15,560  9,760  2,876 
Total assets 133,376  97,334  84,524  64,961  49,407 
Profitability Ratio
Adjusted ROA2 13.83% 23.02% 18.41% 15.02% 5.82%

Based on: 10-K (filing date: 2020-01-30), 10-K (filing date: 2019-01-31), 10-K (filing date: 2018-02-01), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-01-28).

2019 Calculations

1 ROA = 100 × Net income ÷ Total assets
= 100 × 18,485 ÷ 133,376 = 13.86%

2 Adjusted ROA = 100 × Adjusted net income ÷ Total assets
= 100 × 18,445 ÷ 133,376 = 13.83%

Profitability ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Facebook Inc.’s adjusted ROA improved from 2017 to 2018 but then deteriorated significantly from 2018 to 2019.