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Facebook Inc. (FB)

Analysis of Income Taxes

Advanced level

Accounting Policy on Income Taxes

Facebook records 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 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 position, results of operations, and cash flows.

On December 22, 2017, the 2017 Tax Cuts and Jobs Act (Tax Act) was enacted into law and the new legislation contains several key tax provisions that affected Facebook, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. Facebook is required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, re-measuring the U.S. deferred tax assets and liabilities as well as reassessing the net realizability of the deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allowed Facebook to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As a result, Facebook previously provided a provisional estimate of the effect of the Tax Act in the financial statements. In the fourth quarter of 2018, Facebook completed the analysis to determine the effect of the Tax Act and recorded immaterial adjustments as of December 31, 2018.

Source: 10-K (filing date: 2019-01-31).

Income Tax Expense (Benefit)

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

US$ in millions

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12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Federal 1,747  4,455  2,384  3,012  1,999 
State 176  190  179  183  130 
Foreign 1,031  389  195  123  96 
Current tax expense 2,954  5,034  2,758  3,318  2,225 
Federal 316  (296) (414) (800) (240)
State 34  (33) (18) (17) (14)
Foreign (55) (45) (25) 5  (1)
Deferred tax expense (benefits) 295  (374) (457) (812) (255)
Provision for income taxes 3,249  4,660  2,301  2,506  1,970 

Based on: 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), 10-K (filing date: 2015-01-29).

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 increased from 2016 to 2017 but then slightly decreased from 2017 to 2018 not reaching 2016 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 2016 to 2017 and from 2017 to 2018.
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 increased from 2016 to 2017 but then slightly decreased from 2017 to 2018 not reaching 2016 level.

Effective Income Tax Rate (EITR)

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

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
U.S. federal statutory income tax rate 21.00% 35.00% 35.00% 35.00% 35.00%
State income taxes, net of federal benefit 0.70% 0.60% 1.00% 2.00% 1.40%
Research tax credits -1.00% -0.90% -0.70% -1.40% -1.10%
Share-based compensation 0.30% 0.40% 1.00% 2.20% 6.50%
Excess tax benefits related to share-based compensation -2.60% -5.80% -7.00% 0.00% 0.00%
Effect of non-U.S. operations -5.90% -18.60% -12.80% -0.90% -3.60%
Effect of U.S. tax law change 0.00% 11.00% 0.00% 0.00% 0.00%
Other 0.30% 0.90% 1.90% 3.50% 1.90%
Effective tax rate 12.80% 22.60% 18.40% 40.40% 40.10%

Based on: 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), 10-K (filing date: 2015-01-29).

Item Description The company
Effective tax rate Percentage of current income tax expense (benefit) and deferred income tax expense (benefit) pertaining to continuing operations. Facebook Inc.’s effective tax rate increased from 2016 to 2017 but then decreased significantly from 2017 to 2018.

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, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net operating loss carryforward 1,825  1,300  1,252  476  130 
Tax credit carryforward 668  509  268  297  190 
Share-based compensation 270  385  684  529  225 
Accrued expenses and other liabilities 487  381  339  239  136 
Other 153  131  149  34  21 
Deferred tax assets 3,403  2,706  2,692  1,575  702 
Valuation allowance (600) (438) (240) (205) (101)
Deferred tax assets, net of valuation allowance 2,803  2,268  2,452  1,370  601 
Depreciation and amortization (1,401) (622) (535) (270) (101)
Purchased intangible assets (195) (309) (706) (934) (1,190)
Deferred taxes on foreign income —  (88) (357) (15) — 
Deferred tax liabilities (1,596) (1,019) (1,598) (1,219) (1,291)
Net deferred tax assets (liabilities) 1,207  1,249  854  151  (690)

Based on: 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), 10-K (filing date: 2015-01-29).

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 2016 to 2017 and from 2017 to 2018.
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 decreased from 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level.
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) increased from 2016 to 2017 but then slightly decreased from 2017 to 2018.

Adjustments to Financial Statements: Removal of Deferred Taxes

Facebook Inc., adjustments to financial statements

US$ in millions

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Adjustment to Total Liabilities
Total liabilities (as reported) 13,207  10,177  5,767  5,189  4,088 
Less: Noncurrent deferred tax liabilities, net 673  50  —  —  — 
Total liabilities (adjusted) 12,534  10,127  5,767  5,189  4,088 
Adjustment to Stockholders’ Equity
Stockholders’ equity (as reported) 84,127  74,347  59,194  44,218  36,096 
Less: Net deferred tax assets (liabilities) 1,207  1,249  854  151  (690)
Stockholders’ equity (adjusted) 82,920  73,098  58,340  44,067  36,786 
Adjustment to Net Income
Net income (as reported) 22,112  15,934  10,217  3,688  2,940 
Add: Deferred income tax expense (benefit) 295  (374) (457) (812) (255)
Net income (adjusted) 22,407  15,560  9,760  2,876  2,685 

Based on: 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), 10-K (filing date: 2015-01-29).

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, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net Profit Margin
Reported net profit margin 39.60% 39.20% 36.97% 20.57% 23.58%
Adjusted net profit margin 40.13% 38.28% 35.31% 16.04% 21.54%
Financial Leverage
Reported financial leverage 1.16 1.14 1.10 1.12 1.11
Adjusted financial leverage 1.17 1.16 1.11 1.12 1.09
Return on Equity (ROE)
Reported ROE 26.28% 21.43% 17.26% 8.34% 8.14%
Adjusted ROE 27.02% 21.29% 16.73% 6.53% 7.30%
Return on Assets (ROA)
Reported ROA 22.72% 18.85% 15.73% 7.46% 7.32%
Adjusted ROA 23.02% 18.41% 15.02% 5.82% 6.68%

Based on: 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), 10-K (filing date: 2015-01-29).

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 2016 to 2017 and from 2017 to 2018.
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 2016 to 2017 and from 2017 to 2018.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. Facebook Inc.’s adjusted ROE improved from 2016 to 2017 and from 2017 to 2018.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Facebook Inc.’s adjusted ROA improved from 2016 to 2017 and from 2017 to 2018.

Facebook Inc., Financial Ratios: Reported vs. Adjusted

Adjusted Net Profit Margin

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income 22,112  15,934  10,217  3,688  2,940 
Revenue 55,838  40,653  27,638  17,928  12,466 
Profitability Ratio
Net profit margin1 39.60% 39.20% 36.97% 20.57% 23.58%
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted net income 22,407  15,560  9,760  2,876  2,685 
Revenue 55,838  40,653  27,638  17,928  12,466 
Profitability Ratio
Adjusted net profit margin2 40.13% 38.28% 35.31% 16.04% 21.54%

Based on: 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), 10-K (filing date: 2015-01-29).

2018 Calculations

1 Net profit margin = 100 × Net income ÷ Revenue
= 100 × 22,112 ÷ 55,838 = 39.60%

2 Adjusted net profit margin = 100 × Adjusted net income ÷ Revenue
= 100 × 22,407 ÷ 55,838 = 40.13%

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 2016 to 2017 and from 2017 to 2018.

Adjusted Financial Leverage

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Total assets 97,334  84,524  64,961  49,407  40,184 
Stockholders’ equity 84,127  74,347  59,194  44,218  36,096 
Solvency Ratio
Financial leverage1 1.16 1.14 1.10 1.12 1.11
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Total assets 97,334  84,524  64,961  49,407  40,184 
Adjusted stockholders’ equity 82,920  73,098  58,340  44,067  36,786 
Solvency Ratio
Adjusted financial leverage2 1.17 1.16 1.11 1.12 1.09

Based on: 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), 10-K (filing date: 2015-01-29).

2018 Calculations

1 Financial leverage = Total assets ÷ Stockholders’ equity
= 97,334 ÷ 84,127 = 1.16

2 Adjusted financial leverage = Total assets ÷ Adjusted stockholders’ equity
= 97,334 ÷ 82,920 = 1.17

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 2016 to 2017 and from 2017 to 2018.

Adjusted Return on Equity (ROE)

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income 22,112  15,934  10,217  3,688  2,940 
Stockholders’ equity 84,127  74,347  59,194  44,218  36,096 
Profitability Ratio
ROE1 26.28% 21.43% 17.26% 8.34% 8.14%
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted net income 22,407  15,560  9,760  2,876  2,685 
Adjusted stockholders’ equity 82,920  73,098  58,340  44,067  36,786 
Profitability Ratio
Adjusted ROE2 27.02% 21.29% 16.73% 6.53% 7.30%

Based on: 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), 10-K (filing date: 2015-01-29).

2018 Calculations

1 ROE = 100 × Net income ÷ Stockholders’ equity
= 100 × 22,112 ÷ 84,127 = 26.28%

2 Adjusted ROE = 100 × Adjusted net income ÷ Adjusted stockholders’ equity
= 100 × 22,407 ÷ 82,920 = 27.02%

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 2016 to 2017 and from 2017 to 2018.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income 22,112  15,934  10,217  3,688  2,940 
Total assets 97,334  84,524  64,961  49,407  40,184 
Profitability Ratio
ROA1 22.72% 18.85% 15.73% 7.46% 7.32%
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted net income 22,407  15,560  9,760  2,876  2,685 
Total assets 97,334  84,524  64,961  49,407  40,184 
Profitability Ratio
Adjusted ROA2 23.02% 18.41% 15.02% 5.82% 6.68%

Based on: 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), 10-K (filing date: 2015-01-29).

2018 Calculations

1 ROA = 100 × Net income ÷ Total assets
= 100 × 22,112 ÷ 97,334 = 22.72%

2 Adjusted ROA = 100 × Adjusted net income ÷ Total assets
= 100 × 22,407 ÷ 97,334 = 23.02%

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 2016 to 2017 and from 2017 to 2018.