Microsoft Excel LibreOffice Calc

Analysis of Income Taxes

Difficulty: Advanced


Income Tax Accounting Policy

Income tax expense is based on reported income before income taxes. Deferred income taxes reflect the tax effect of temporary differences between asset and liability amounts that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. These deferred taxes are measured by applying currently enacted tax laws. Valuation allowances are recognized to reduce deferred tax assets to the amount that will more likely than not be realized. In assessing the need for a valuation allowance, management considers all available evidence for each jurisdiction including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies. When IBM changes its determination as to the amount of deferred tax assets that can be realized, the valuation allowance is adjusted with a corresponding impact to income tax expense in the period in which such determination is made.

IBM recognizes tax liabilities when, despite IBM's belief that its tax return positions are supportable, IBM believes that certain positions may not be fully sustained upon review by tax authorities. Benefits from tax positions are measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. The current portion of tax liabilities is included in taxes and the noncurrent portion of tax liabilities is included in other liabilities in the Consolidated Statement of Financial Position. To the extent that new information becomes available which causes IBM to change its judgment regarding the adequacy of existing tax liabilities, such changes to tax liabilities will impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax expense.

Source: 10-K (filing date: 2018-02-27).


Income Tax Expense (Benefit)

International Business Machines Corp., 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
U.S. federal 2,388  186  (321) 1,134  1,406 
U.S. state and local 55  244  128  541  178 
Non-U.S. 3,891  988  2,101  2,825  3,067 
Current 6,334  1,418  1,908  4,500  4,651 
U.S. federal 77  (746) 553  105  (652)
U.S. state and local 28  (44) 116  (105) (321)
Non-U.S. (797) (179) (265) (637)
Deferred (692) (969) 673  (265) (1,610)
Provision for income taxes 5,642  449  2,581  4,235  3,041 

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

Item Description The company
Current Amount of current income tax expense (benefit) pertaining to taxable income (loss) from continuing operations. International Business Machines Corp.'s current declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level.
Deferred Amount of deferred income tax expense (benefit) pertaining to income (loss) from continuing operations. International Business Machines Corp.'s deferred declined from 2015 to 2016 but then slightly increased from 2016 to 2017.
Provision for income taxes Amount of current income tax expense (benefit) and deferred income tax expense (benefit) pertaining to continuing operations. International Business Machines Corp.'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)

International Business Machines Corp., 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
Statutory tax rate 35.00% 35.00% 35.00% 35.00% 35.00%
U.S. Tax Cuts and Jobs Act 48.00% 0.00% 0.00% 0.00% 0.00%
Foreign tax differential -26.00% -21.00% -17.00% -14.00% -14.00%
Intra-entity transfers -5.00% 0.00% 0.00% 0.00% 0.00%
Domestic incentives -2.00% -1.00% -2.00% -2.00% -3.00%
State and local 1.00% 1.00% 1.00% 1.00% 0.00%
Japan resolution 0.00% -10.00% 0.00% 0.00% 0.00%
Other -2.00% 0.00% -1.00% 1.00% -2.00%
Effective tax rate 49.00% 4.00% 16.00% 21.00% 16.00%

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

Item Description The company
Effective tax rate Percentage of current income tax expense (benefit) and deferred income tax expense (benefit) pertaining to continuing operations. International Business Machines Corp.'s effective tax rate declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level.

Components of Deferred Tax Assets and Liabilities

International Business Machines Corp., 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
Retirement benefits 3,477  4,671  4,621  4,795  3,704 
Share-based and other compensation 646  1,132  963  1,328  1,262 
Domestic tax loss/credit carryforwards 718  1,676  1,066  858  982 
Deferred income 605  741  762  957  964 
Foreign tax loss/credit carryforwards 1,024  816  825  686  651 
Bad debt, inventory and warranty reserves 395  473  528  529  592 
Depreciation 293  270  329  329  382 
Accruals 387  624  904  1,176  322 
Intangible assets 585  –  –  –  – 
Other 1,396  1,503  931  1,306  1,452 
Gross deferred tax assets 9,526  11,906  10,929  11,964  10,311 
Valuation allowance (1,004) (916) (740) (646) (734)
Net deferred tax assets 8,522  10,990  10,189  11,318  9,577 
Depreciation (641) (856) (919) (487) (1,346)
Retirement benefits (483) (406) (252) (205) (1,219)
Goodwill and intangible assets (1,226) (1,800) (1,407) (1,263) (1,173)
Leases (584) (651) (916) (912) (1,119)
Software development costs (360) (672) (554) (421) (558)
Deferred transition costs (254) (351) (395) (374) (424)
Other (658) (1,455) (1,177) (1,111) (841)
Gross deferred tax liabilities (4,206) (6,191) (5,620) (4,773) (6,680)
Net deferred tax assets (liabilities) 4,316  4,799  4,569  6,545  2,897 

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

Item Description The company
Gross deferred tax assets Amount before allocation of valuation allowances of deferred tax asset attributable to deductible temporary differences and carryforwards. International Business Machines Corp.'s gross deferred tax assets increased from 2015 to 2016 but then declined significantly from 2016 to 2017.
Net deferred tax assets Amount after allocation of valuation allowances of deferred tax asset attributable to deductible temporary differences and carryforwards. International Business Machines Corp.'s net deferred tax assets increased from 2015 to 2016 but then declined significantly from 2016 to 2017.
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. International Business Machines Corp.'s net deferred tax assets (liabilities) increased from 2015 to 2016 but then declined significantly from 2016 to 2017.

Deferred Tax Assets and Liabilities, Classification

International Business Machines Corp., deferred tax assets and liabilities, classification

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Current deferred tax assets –  –  –  2,044  1,651 
Noncurrent deferred tax assets 4,862  5,224  4,822  4,808  3,051 
Current deferred tax liabilities –  –  –  19  64 
Noncurrent deferred tax liabilities 545  424  253  288  1,741 

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

Item Description The company
Noncurrent deferred tax assets Amount, after allocation of valuation allowances and deferred tax liability, of deferred tax asset attributable to deductible differences and carryforwards, with jurisdictional netting and classified as noncurrent. International Business Machines Corp.'s noncurrent deferred tax assets increased from 2015 to 2016 but then slightly declined from 2016 to 2017 not reaching 2015 level.
Noncurrent deferred tax liabilities Amount, after deferred tax asset, of deferred tax liability attributable to taxable differences, with jurisdictional netting and classified as noncurrent. International Business Machines Corp.'s noncurrent deferred tax liabilities increased from 2015 to 2016 and from 2016 to 2017.

Analyst Adjustments: Removal of Deferred Taxes

International Business Machines Corp., 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 Current Assets
Current assets (as reported) 49,735  43,888  42,504  49,422  51,350 
Less: Current deferred tax assets, net –  –  –  2,044  1,651 
Current assets (adjusted) 49,735  43,888  42,504  47,378  49,699 
Adjustment to Total Assets
Total assets (as reported) 125,356  117,470  110,495  117,532  126,223 
Less: Current deferred tax assets, net –  –  –  2,044  1,651 
Less: Noncurrent deferred tax assets, net 4,862  5,224  4,822  4,808  3,051 
Total assets (adjusted) 120,494  112,246  105,673  110,680  121,521 
Adjustment to Current Liabilities
Current liabilities (as reported) 37,363  36,275  34,269  39,600  40,154 
Less: Current deferred tax liabilities, net –  –  –  19  64 
Current liabilities (adjusted) 37,363  36,275  34,269  39,581  40,090 
Adjustment to Total Liabilities
Total liabilities (as reported) 107,631  99,078  96,071  105,518  103,294 
Less: Current deferred tax liabilities, net –  –  –  19  64 
Less: Noncurrent deferred tax liabilities, net 545  424  253  288  1,741 
Total liabilities (adjusted) 107,086  98,654  95,818  105,211  101,489 
Adjustment to Total IBM Stockholders' Equity
Total IBM stockholders' equity (as reported) 17,594  18,246  14,262  11,868  22,792 
Less: Net deferred tax assets (liabilities) 4,316  4,799  4,569  6,545  2,897 
Total IBM stockholders' equity (adjusted) 13,278  13,447  9,693  5,323  19,895 
Adjustment to Net Income Attributable To IBM
Net income attributable to IBM (as reported) 5,753  11,872  13,190  12,022  16,483 
Add: Deferred income tax expense (benefit) (692) (969) 673  (265) (1,610)
Net income attributable to IBM (adjusted) 5,061  10,903  13,863  11,757  14,873 

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).


International Business Machines Corp., Financial Data: Reported vs. Adjusted


Adjusted Ratios: Removal of Deferred Taxes (Summary)

International Business Machines Corp., adjusted ratios

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Current Ratio
Reported current ratio 1.33 1.21 1.24 1.25 1.28
Adjusted current ratio 1.33 1.21 1.24 1.20 1.24
Net Profit Margin
Reported net profit margin 7.27% 14.86% 16.14% 12.96% 16.52%
Adjusted net profit margin 6.40% 13.64% 16.96% 12.67% 14.91%
Total Asset Turnover
Reported total asset turnover 0.63 0.68 0.74 0.79 0.79
Adjusted total asset turnover 0.66 0.71 0.77 0.84 0.82
Financial Leverage
Reported financial leverage 7.12 6.44 7.75 9.90 5.54
Adjusted financial leverage 9.07 8.35 10.90 20.79 6.11
Return on Equity (ROE)
Reported ROE 32.70% 65.07% 92.48% 101.30% 72.32%
Adjusted ROE 38.12% 81.08% 143.02% 220.87% 74.76%
Return on Assets (ROA)
Reported ROA 4.59% 10.11% 11.94% 10.23% 13.06%
Adjusted ROA 4.20% 9.71% 13.12% 10.62% 12.24%

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

Ratio Description The company
Adjusted current ratio A liquidity ratio calculated as adjusted current assets divided by adjusted current liabilities. International Business Machines Corp.'s adjusted current ratio deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by total revenue. International Business Machines Corp.'s adjusted net profit margin deteriorated 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. International Business Machines Corp.'s adjusted total asset turnover deteriorated 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.
International Business Machines Corp.'s adjusted financial leverage declined from 2015 to 2016 but then slightly increased from 2016 to 2017.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. International Business Machines Corp.'s adjusted ROE deteriorated from 2015 to 2016 and from 2016 to 2017.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. International Business Machines Corp.'s adjusted ROA deteriorated from 2015 to 2016 and from 2016 to 2017.

International Business Machines Corp., Ratios: Reported vs. Adjusted


Adjusted Current Ratio

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Selected Financial Data (USD $ in millions)
Current assets 49,735  43,888  42,504  49,422  51,350 
Current liabilities 37,363  36,275  34,269  39,600  40,154 
Ratio
Current ratio1 1.33 1.21 1.24 1.25 1.28
Adjusted for Deferred Taxes
Selected Financial Data (USD $ in millions)
Adjusted current assets 49,735  43,888  42,504  47,378  49,699 
Adjusted current liabilities 37,363  36,275  34,269  39,581  40,090 
Ratio
Adjusted current ratio2 1.33 1.21 1.24 1.20 1.24

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

2017 Calculations

1 Current ratio = Current assets ÷ Current liabilities
= 49,735 ÷ 37,363 = 1.33

2 Adjusted current ratio = Adjusted current assets ÷ Adjusted current liabilities
= 49,735 ÷ 37,363 = 1.33

Ratio Description The company
Adjusted current ratio A liquidity ratio calculated as adjusted current assets divided by adjusted current liabilities. International Business Machines Corp.'s adjusted current ratio deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

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
Selected Financial Data (USD $ in millions)
Net income attributable to IBM 5,753  11,872  13,190  12,022  16,483 
Revenue 79,139  79,919  81,741  92,793  99,751 
Ratio
Net profit margin1 7.27% 14.86% 16.14% 12.96% 16.52%
Adjusted for Deferred Taxes
Selected Financial Data (USD $ in millions)
Adjusted net income attributable to IBM 5,061  10,903  13,863  11,757  14,873 
Revenue 79,139  79,919  81,741  92,793  99,751 
Ratio
Adjusted net profit margin2 6.40% 13.64% 16.96% 12.67% 14.91%

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

2017 Calculations

1 Net profit margin = 100 × Net income attributable to IBM ÷ Revenue
= 100 × 5,753 ÷ 79,139 = 7.27%

2 Adjusted net profit margin = 100 × Adjusted net income attributable to IBM ÷ Revenue
= 100 × 5,061 ÷ 79,139 = 6.40%

Ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by total revenue. International Business Machines Corp.'s adjusted net profit margin deteriorated 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
Selected Financial Data (USD $ in millions)
Revenue 79,139  79,919  81,741  92,793  99,751 
Total assets 125,356  117,470  110,495  117,532  126,223 
Ratio
Total asset turnover1 0.63 0.68 0.74 0.79 0.79
Adjusted for Deferred Taxes
Selected Financial Data (USD $ in millions)
Revenue 79,139  79,919  81,741  92,793  99,751 
Adjusted total assets 120,494  112,246  105,673  110,680  121,521 
Ratio
Adjusted total asset turnover2 0.66 0.71 0.77 0.84 0.82

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

2017 Calculations

1 Total asset turnover = Revenue ÷ Total assets
= 79,139 ÷ 125,356 = 0.63

2 Adjusted total asset turnover = Revenue ÷ Adjusted total assets
= 79,139 ÷ 120,494 = 0.66

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. International Business Machines Corp.'s adjusted total asset turnover deteriorated 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
Selected Financial Data (USD $ in millions)
Total assets 125,356  117,470  110,495  117,532  126,223 
Total IBM stockholders' equity 17,594  18,246  14,262  11,868  22,792 
Ratio
Financial leverage1 7.12 6.44 7.75 9.90 5.54
Adjusted for Deferred Taxes
Selected Financial Data (USD $ in millions)
Adjusted total assets 120,494  112,246  105,673  110,680  121,521 
Adjusted total IBM stockholders' equity 13,278  13,447  9,693  5,323  19,895 
Ratio
Adjusted financial leverage2 9.07 8.35 10.90 20.79 6.11

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

2017 Calculations

1 Financial leverage = Total assets ÷ Total IBM stockholders' equity
= 125,356 ÷ 17,594 = 7.12

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted total IBM stockholders' equity
= 120,494 ÷ 13,278 = 9.07

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.
International Business Machines Corp.'s adjusted financial leverage declined from 2015 to 2016 but then slightly increased from 2016 to 2017.

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
Selected Financial Data (USD $ in millions)
Net income attributable to IBM 5,753  11,872  13,190  12,022  16,483 
Total IBM stockholders' equity 17,594  18,246  14,262  11,868  22,792 
Ratio
ROE1 32.70% 65.07% 92.48% 101.30% 72.32%
Adjusted for Deferred Taxes
Selected Financial Data (USD $ in millions)
Adjusted net income attributable to IBM 5,061  10,903  13,863  11,757  14,873 
Adjusted total IBM stockholders' equity 13,278  13,447  9,693  5,323  19,895 
Ratio
Adjusted ROE2 38.12% 81.08% 143.02% 220.87% 74.76%

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

2017 Calculations

1 ROE = 100 × Net income attributable to IBM ÷ Total IBM stockholders' equity
= 100 × 5,753 ÷ 17,594 = 32.70%

2 Adjusted ROE = 100 × Adjusted net income attributable to IBM ÷ Adjusted total IBM stockholders' equity
= 100 × 5,061 ÷ 13,278 = 38.12%

Ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. International Business Machines Corp.'s adjusted ROE deteriorated 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
Selected Financial Data (USD $ in millions)
Net income attributable to IBM 5,753  11,872  13,190  12,022  16,483 
Total assets 125,356  117,470  110,495  117,532  126,223 
Ratio
ROA1 4.59% 10.11% 11.94% 10.23% 13.06%
Adjusted for Deferred Taxes
Selected Financial Data (USD $ in millions)
Adjusted net income attributable to IBM 5,061  10,903  13,863  11,757  14,873 
Adjusted total assets 120,494  112,246  105,673  110,680  121,521 
Ratio
Adjusted ROA2 4.20% 9.71% 13.12% 10.62% 12.24%

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

2017 Calculations

1 ROA = 100 × Net income attributable to IBM ÷ Total assets
= 100 × 5,753 ÷ 125,356 = 4.59%

2 Adjusted ROA = 100 × Adjusted net income attributable to IBM ÷ Adjusted total assets
= 100 × 5,061 ÷ 120,494 = 4.20%

Ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. International Business Machines Corp.'s adjusted ROA deteriorated from 2015 to 2016 and from 2016 to 2017.