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Microsoft Excel LibreOffice Calc


Analysis of Income Taxes

Difficulty: Advanced


Income Tax Accounting Policy

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 (the 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 allows Facebook to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation is expected over the next 12 months, Facebook considers the accounting of the transition tax, deferred tax re-measurements, and other items to be incomplete due to the forthcoming guidance and the ongoing analysis of final year-end data and tax positions. Facebook expects to complete the analysis within the measurement period in accordance with SAB 118.

Source: Facebook Inc., Annual Report


Income Tax Expense (Benefit)

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

USD $ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Federal hidden hidden hidden hidden hidden
State hidden hidden hidden hidden hidden
Foreign hidden hidden hidden hidden hidden
Current tax expense hidden hidden hidden hidden hidden
Federal hidden hidden hidden hidden hidden
State hidden hidden hidden hidden hidden
Foreign hidden hidden hidden hidden hidden
Deferred tax benefit hidden hidden hidden hidden hidden
Provision for income taxes hidden hidden hidden hidden hidden

Source: Based on data from Facebook Inc. Annual Reports

Item Description The company
Current tax expense 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. Facebook Inc.'s current tax expense declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level.
Deferred tax 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. Facebook Inc.'s deferred tax benefit increased from 2015 to 2016 and from 2016 to 2017.
Provision 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. Facebook Inc.'s provision for income taxes declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level.

Effective Income Tax Rate (EITR)

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

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
U.S. federal statutory income tax rate hidden% hidden% hidden% hidden% hidden%
State income taxes, net of federal benefit hidden% hidden% hidden% hidden% hidden%
Research tax credits hidden% hidden% hidden% hidden% hidden%
Share-based compensation hidden% hidden% hidden% hidden% hidden%
Excess tax benefits related to share-based compensation hidden% hidden% hidden% hidden% hidden%
Effect of non-U.S. operations hidden% hidden% hidden% hidden% hidden%
Effect of U.S. tax law change hidden% hidden% hidden% hidden% hidden%
Other hidden% hidden% hidden% hidden% hidden%
Effective tax rate hidden% hidden% hidden% hidden% hidden%

Source: Based on data from Facebook Inc. Annual Reports

Item Description The company
Effective tax 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. Facebook Inc.'s effective tax rate declined from 2015 to 2016 but then slightly increased from 2016 to 2017.

Components of Deferred Tax Assets and Liabilities

Facebook Inc., components of deferred tax assets and liabilities

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Net operating loss carryforward hidden hidden hidden hidden hidden
Tax credit carryforward hidden hidden hidden hidden hidden
Share-based compensation hidden hidden hidden hidden hidden
Accrued expenses and other liabilities hidden hidden hidden hidden hidden
Other hidden hidden hidden hidden hidden
Deferred tax assets hidden hidden hidden hidden hidden
Valuation allowance hidden hidden hidden hidden hidden
Deferred tax assets, net of valuation allowance hidden hidden hidden hidden hidden
Depreciation and amortization hidden hidden hidden hidden hidden
Purchased intangible assets hidden hidden hidden hidden hidden
Deferred taxes on foreign income hidden hidden hidden hidden hidden
Deferred tax liabilities hidden hidden hidden hidden hidden
Net deferred tax assets (liabilities) hidden hidden hidden hidden hidden

Source: Based on data from Facebook Inc. Annual Reports

Item Description The company
Deferred tax assets 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. Facebook Inc.'s deferred tax assets increased from 2015 to 2016 and from 2016 to 2017.
Deferred tax assets, net of valuation allowance 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. Facebook Inc.'s deferred tax assets, net of valuation allowance increased from 2015 to 2016 but then slightly declined from 2016 to 2017.
Net deferred tax assets (liabilities) 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. Facebook Inc.'s net deferred tax assets (liabilities) increased from 2015 to 2016 and from 2016 to 2017.

Analyst Adjustments: Removal of Deferred Taxes

Facebook Inc., adjustments to financial data

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Adjustment to Total Assets
Total assets (as reported) hidden hidden hidden hidden hidden
Less: Noncurrent deferred tax assets, net hidden hidden hidden hidden hidden
Total assets (adjusted) hidden hidden hidden hidden hidden
Adjustment to Total Liabilities
Total liabilities (as reported) hidden hidden hidden hidden hidden
Less: Noncurrent deferred tax liabilities, net hidden hidden hidden hidden hidden
Total liabilities (adjusted) hidden hidden hidden hidden hidden
Adjustment to Stockholders' Equity
Stockholders' equity (as reported) hidden hidden hidden hidden hidden
Less: Net deferred tax assets (liabilities) hidden hidden hidden hidden hidden
Stockholders' equity (adjusted) hidden hidden hidden hidden hidden
Adjustment to Net Income
Net income (as reported) hidden hidden hidden hidden hidden
Add: Deferred income tax expense (benefit) hidden hidden hidden hidden hidden
Net income (adjusted) hidden hidden hidden hidden hidden

Adjusted Ratios: Removal of Deferred Taxes (Summary)

Facebook Inc., adjusted ratios

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Net Profit Margin
Reported net profit margin hidden% hidden% hidden% hidden% hidden%
Adjusted net profit margin hidden% hidden% hidden% hidden% hidden%
Total Asset Turnover
Reported total asset turnover hidden hidden hidden hidden hidden
Adjusted total asset turnover hidden hidden hidden hidden hidden
Financial Leverage
Reported financial leverage hidden hidden hidden hidden hidden
Adjusted financial leverage hidden hidden hidden hidden hidden
Return on Equity (ROE)
Reported ROE hidden% hidden% hidden% hidden% hidden%
Adjusted ROE hidden% hidden% hidden% hidden% hidden%
Return on Assets (ROA)
Reported ROA hidden% hidden% hidden% hidden% hidden%
Adjusted ROA hidden% hidden% hidden% hidden% hidden%
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 improved from 2015 to 2016 and from 2016 to 2017.
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Facebook Inc.'s adjusted total asset turnover improved from 2015 to 2016 and from 2016 to 2017.
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 declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. Facebook Inc.'s adjusted ROE improved from 2015 to 2016 and from 2016 to 2017.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Facebook Inc.'s adjusted ROA improved from 2015 to 2016 and from 2016 to 2017.

Adjusted Net Profit Margin

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net income (USD $ in millions) hidden hidden hidden hidden hidden
Revenue (USD $ in millions) hidden hidden hidden hidden hidden
Net profit margin1 hidden% hidden% hidden% hidden% hidden%
Adjusted for Deferred Taxes
Adjusted net income (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted net profit margin2 hidden% hidden% hidden% hidden% hidden%

2017 Calculations

1 Net profit margin = 100 × Net income ÷ Revenue
= 100 × hidden ÷ hidden = hidden%

2 Adjusted net profit margin = 100 × Adjusted net income ÷ Revenue
= 100 × hidden ÷ hidden = hidden%

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 improved from 2015 to 2016 and from 2016 to 2017.

Adjusted Total Asset Turnover

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Revenue (USD $ in millions) hidden hidden hidden hidden hidden
Total assets (USD $ in millions) hidden hidden hidden hidden hidden
Total asset turnover1 hidden hidden hidden hidden hidden
Adjusted for Deferred Taxes
Adjusted total assets (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted total asset turnover2 hidden hidden hidden hidden hidden

2017 Calculations

1 Total asset turnover = Revenue ÷ Total assets
= hidden ÷ hidden = hidden

2 Adjusted total asset turnover = Revenue ÷ Adjusted total assets
= hidden ÷ hidden = hidden

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Facebook Inc.'s adjusted total asset turnover improved from 2015 to 2016 and from 2016 to 2017.

Adjusted Financial Leverage

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Total assets (USD $ in millions) hidden hidden hidden hidden hidden
Stockholders' equity (USD $ in millions) hidden hidden hidden hidden hidden
Financial leverage1 hidden hidden hidden hidden hidden
Adjusted for Deferred Taxes
Adjusted total assets (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted stockholders' equity (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted financial leverage2 hidden hidden hidden hidden hidden

2017 Calculations

1 Financial leverage = Total assets ÷ Stockholders' equity
= hidden ÷ hidden = hidden

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted stockholders' equity
= hidden ÷ hidden = hidden

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 declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level.

Adjusted Return on Equity (ROE)

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net income (USD $ in millions) hidden hidden hidden hidden hidden
Stockholders' equity (USD $ in millions) hidden hidden hidden hidden hidden
ROE1 hidden% hidden% hidden% hidden% hidden%
Adjusted for Deferred Taxes
Adjusted net income (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted stockholders' equity (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted ROE2 hidden% hidden% hidden% hidden% hidden%

2017 Calculations

1 ROE = 100 × Net income ÷ Stockholders' equity
= 100 × hidden ÷ hidden = hidden%

2 Adjusted ROE = 100 × Adjusted net income ÷ Adjusted stockholders' equity
= 100 × hidden ÷ hidden = hidden%

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 2015 to 2016 and from 2016 to 2017.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net income (USD $ in millions) hidden hidden hidden hidden hidden
Total assets (USD $ in millions) hidden hidden hidden hidden hidden
ROA1 hidden% hidden% hidden% hidden% hidden%
Adjusted for Deferred Taxes
Adjusted net income (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted total assets (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted ROA2 hidden% hidden% hidden% hidden% hidden%

2017 Calculations

1 ROA = 100 × Net income ÷ Total assets
= 100 × hidden ÷ hidden = hidden%

2 Adjusted ROA = 100 × Adjusted net income ÷ Adjusted total assets
= 100 × hidden ÷ hidden = hidden%

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 2015 to 2016 and from 2016 to 2017.