Microsoft Excel LibreOffice Calc

International Business Machines Corp. (IBM)

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.

The U.S. Tax Cuts and Jobs Act introduced GILTI, which subjects a U.S. shareholder to current tax on income earned by certain foreign subsidiaries. The Financial Accounting Standards Board (FASB) allows companies to either (1) recognize deferred taxes for temporary differences that are expected to reverse as GILTI in future years (deferred method) or (2) account for taxes on GILTI as period costs in the year the tax is incurred (period method). IBM elected the deferred method and in order to record the initial deferred taxes for GILTI, IBM estimated the impact of foreign temporary differences on GILTI in future years. This included consideration of statutory limitation impacts on the GILTI calculation.

Source: 10-K (filing date: 2019-02-26).

Income Tax Expense (Benefit)

International Business Machines Corp., income tax expense (benefit), continuing operations

USD $ in millions

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12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
U.S. federal (342) 2,388  186  (321) 1,134 
U.S. state and local 127  55  244  128  541 
Non-U.S. 2,135  3,891  988  2,101  2,825 
Current 1,920  6,334  1,418  1,908  4,500 
U.S. federal 1,377  77  (746) 553  105 
U.S. state and local (292) 28  (44) 116  (105)
Non-U.S. (386) (797) (179) 4  (265)
Deferred 699  (692) (969) 673  (265)
Provision for income taxes 2,619  5,642  449  2,581  4,235 

Based on: 10-K (filing date: 2019-02-26), 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).

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 increased from 2016 to 2017 but then slightly declined from 2017 to 2018 not reaching 2016 level.
Deferred Amount of deferred income tax expense (benefit) pertaining to income (loss) from continuing operations. International Business Machines Corp.’s deferred 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. International Business Machines Corp.’s provision for income taxes increased from 2016 to 2017 but then slightly declined from 2017 to 2018 not reaching 2016 level.

Effective Income Tax Rate (EITR)

International Business Machines Corp., 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
Statutory tax rate 21.00% 35.00% 35.00% 35.00% 35.00%
Foreign tax differential -11.00% -26.00% -21.00% -17.00% -14.00%
Intra-entity transfers 0.00% -5.00% 0.00% 0.00% 0.00%
Domestic incentives -1.00% -2.00% -1.00% -2.00% -2.00%
State and local -1.00% 1.00% 1.00% 1.00% 1.00%
Japan resolution 0.00% 0.00% -10.00% 0.00% 0.00%
Other -3.00% -2.00% 0.00% -1.00% 1.00%
Effective tax rate, before enactment of U.S. tax reform 5.00% 1.00% 4.00% 16.00% 21.00%
Enactment of U.S. tax reform 18.00% 48.00% 0.00% 0.00% 0.00%
Effective tax rate 23.00% 49.00% 4.00% 16.00% 21.00%

Based on: 10-K (filing date: 2019-02-26), 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).

Item Description The company
Effective tax rate, before enactment of U.S. tax reform 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, before enactment of U.S. tax reform declined from 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level.

Components of Deferred Tax Assets and Liabilities

International Business Machines Corp., components of deferred tax assets and liabilities

USD $ in millions

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Retirement benefits 3,620  3,477  4,671  4,621  4,795 
Share-based and other compensation 636  646  1,132  963  1,328 
Domestic tax loss/credit carryforwards 964  718  1,676  1,066  858 
Deferred income 674  605  741  762  957 
Foreign tax loss/credit carryforwards 903  1,024  816  825  686 
Bad debt, inventory and warranty reserves 348  395  473  528  529 
Depreciation 231  293  270  329  329 
Accruals 336  387  624  904  1,176 
Intangible assets 620  585  –  –  – 
Other 1,501  1,396  1,503  931  1,306 
Gross deferred tax assets 9,833  9,526  11,906  10,929  11,964 
Valuation allowance (915) (1,004) (916) (740) (646)
Net deferred tax assets 8,918  8,522  10,990  10,189  11,318 
Depreciation (719) (641) (856) (919) (487)
Retirement benefits (455) (483) (406) (252) (205)
Goodwill and intangible assets (1,200) (1,226) (1,800) (1,407) (1,263)
Leases (580) (584) (651) (916) (912)
Software development costs (292) (360) (672) (554) (421)
Deferred transition costs (233) (254) (351) (395) (374)
GILTI deferred taxes (1,927) –  –  –  – 
Undistributed foreign earnings (981) –  –  –  – 
Other (1,011) (658) (1,455) (1,177) (1,111)
Gross deferred tax liabilities (7,398) (4,206) (6,191) (5,620) (4,773)
Net deferred tax assets (liabilities) 1,520  4,316  4,799  4,569  6,545 

Based on: 10-K (filing date: 2019-02-26), 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).

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 declined from 2016 to 2017 but then slightly increased from 2017 to 2018.
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 declined from 2016 to 2017 but then slightly increased from 2017 to 2018.
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) declined from 2016 to 2017 and from 2017 to 2018.

Deferred Tax Assets and Liabilities, Classification

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

USD $ in millions

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Current deferred tax assets –  –  –  –  2,044 
Noncurrent deferred tax assets 5,216  4,862  5,224  4,822  4,808 
Current deferred tax liabilities –  –  –  –  19 
Noncurrent deferred tax liabilities 3,696  545  424  253  288 

Based on: 10-K (filing date: 2019-02-26), 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).

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 declined from 2016 to 2017 but then increased from 2017 to 2018 not reaching 2016 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 2016 to 2017 and from 2017 to 2018.

Analyst Adjustments: Removal of Deferred Taxes

International Business Machines Corp., adjustments to financial data

USD $ in millions

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Adjustment to Current Assets
Current assets (as reported) 49,146  49,735  43,888  42,504  49,422 
Less: Current deferred tax assets, net –  –  –  –  2,044 
Current assets (adjusted) 49,146  49,735  43,888  42,504  47,378 
Adjustment to Total Assets
Total assets (as reported) 123,382  125,356  117,470  110,495  117,532 
Less: Current deferred tax assets, net –  –  –  –  2,044 
Less: Noncurrent deferred tax assets, net 5,216  4,862  5,224  4,822  4,808 
Total assets (adjusted) 118,166  120,494  112,246  105,673  110,680 
Adjustment to Current Liabilities
Current liabilities (as reported) 38,227  37,363  36,275  34,269  39,600 
Less: Current deferred tax liabilities, net –  –  –  –  19 
Current liabilities (adjusted) 38,227  37,363  36,275  34,269  39,581 
Adjustment to Total Liabilities
Total liabilities (as reported) 106,452  107,631  99,078  96,071  105,518 
Less: Current deferred tax liabilities, net –  –  –  –  19 
Less: Noncurrent deferred tax liabilities, net 3,696  545  424  253  288 
Total liabilities (adjusted) 102,756  107,086  98,654  95,818  105,211 
Adjustment to Total IBM Stockholders’ Equity
Total IBM stockholders’ equity (as reported) 16,796  17,594  18,246  14,262  11,868 
Less: Net deferred tax assets (liabilities) 1,520  4,316  4,799  4,569  6,545 
Total IBM stockholders’ equity (adjusted) 15,276  13,278  13,447  9,693  5,323 
Adjustment to Net Income Attributable To IBM
Net income attributable to IBM (as reported) 8,728  5,753  11,872  13,190  12,022 
Add: Deferred income tax expense (benefit) 699  (692) (969) 673  (265)
Net income attributable to IBM (adjusted) 9,427  5,061  10,903  13,863  11,757 

Based on: 10-K (filing date: 2019-02-26), 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).

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

Adjusted Ratios: Removal of Deferred Taxes (Summary)

International Business Machines Corp., adjusted ratios

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Current Ratio
Reported current ratio 1.29 1.33 1.21 1.24 1.25
Adjusted current ratio 1.29 1.33 1.21 1.24 1.20
Net Profit Margin
Reported net profit margin 10.97% 7.27% 14.86% 16.14% 12.96%
Adjusted net profit margin 11.84% 6.40% 13.64% 16.96% 12.67%
Total Asset Turnover
Reported total asset turnover 0.65 0.63 0.68 0.74 0.79
Adjusted total asset turnover 0.67 0.66 0.71 0.77 0.84
Financial Leverage
Reported financial leverage 7.35 7.12 6.44 7.75 9.90
Adjusted financial leverage 7.74 9.07 8.35 10.90 20.79
Return on Equity (ROE)
Reported ROE 51.96% 32.70% 65.07% 92.48% 101.30%
Adjusted ROE 61.71% 38.12% 81.08% 143.02% 220.87%
Return on Assets (ROA)
Reported ROA 7.07% 4.59% 10.11% 11.94% 10.23%
Adjusted ROA 7.98% 4.20% 9.71% 13.12% 10.62%

Based on: 10-K (filing date: 2019-02-26), 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).

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 improved from 2016 to 2017 but then slightly deteriorated from 2017 to 2018.
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 2016 to 2017 but then improved from 2017 to 2018 not reaching 2016 level.
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 2016 to 2017 but then slightly improved 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.		 International Business Machines Corp.’s adjusted financial leverage increased from 2016 to 2017 but then declined significantly from 2017 to 2018.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. International Business Machines Corp.’s adjusted ROE deteriorated from 2016 to 2017 but then improved from 2017 to 2018 not reaching 2016 level.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. International Business Machines Corp.’s adjusted ROA deteriorated from 2016 to 2017 but then improved from 2017 to 2018 not reaching 2016 level.

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

Adjusted Current Ratio

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (USD $ in millions)
Current assets 49,146  49,735  43,888  42,504  49,422 
Current liabilities 38,227  37,363  36,275  34,269  39,600 
Ratio
Current ratio1 1.29 1.33 1.21 1.24 1.25
Adjusted for Deferred Taxes
Selected Financial Data (USD $ in millions)
Adjusted current assets 49,146  49,735  43,888  42,504  47,378 
Adjusted current liabilities 38,227  37,363  36,275  34,269  39,581 
Ratio
Adjusted current ratio2 1.29 1.33 1.21 1.24 1.20

Based on: 10-K (filing date: 2019-02-26), 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).

2018 Calculations

1 Current ratio = Current assets ÷ Current liabilities
= 49,146 ÷ 38,227 = 1.29

2 Adjusted current ratio = Adjusted current assets ÷ Adjusted current liabilities
= 49,146 ÷ 38,227 = 1.29

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 improved from 2016 to 2017 but then slightly deteriorated from 2017 to 2018.

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 (USD $ in millions)
Net income attributable to IBM 8,728  5,753  11,872  13,190  12,022 
Revenue 79,591  79,139  79,919  81,741  92,793 
Ratio
Net profit margin1 10.97% 7.27% 14.86% 16.14% 12.96%
Adjusted for Deferred Taxes
Selected Financial Data (USD $ in millions)
Adjusted net income attributable to IBM 9,427  5,061  10,903  13,863  11,757 
Revenue 79,591  79,139  79,919  81,741  92,793 
Ratio
Adjusted net profit margin2 11.84% 6.40% 13.64% 16.96% 12.67%

Based on: 10-K (filing date: 2019-02-26), 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).

2018 Calculations

1 Net profit margin = 100 × Net income attributable to IBM ÷ Revenue
= 100 × 8,728 ÷ 79,591 = 10.97%

2 Adjusted net profit margin = 100 × Adjusted net income attributable to IBM ÷ Revenue
= 100 × 9,427 ÷ 79,591 = 11.84%

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 2016 to 2017 but then improved from 2017 to 2018 not reaching 2016 level.

Adjusted Total Asset Turnover

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (USD $ in millions)
Revenue 79,591  79,139  79,919  81,741  92,793 
Total assets 123,382  125,356  117,470  110,495  117,532 
Ratio
Total asset turnover1 0.65 0.63 0.68 0.74 0.79
Adjusted for Deferred Taxes
Selected Financial Data (USD $ in millions)
Revenue 79,591  79,139  79,919  81,741  92,793 
Adjusted total assets 118,166  120,494  112,246  105,673  110,680 
Ratio
Adjusted total asset turnover2 0.67 0.66 0.71 0.77 0.84

Based on: 10-K (filing date: 2019-02-26), 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).

2018 Calculations

1 Total asset turnover = Revenue ÷ Total assets
= 79,591 ÷ 123,382 = 0.65

2 Adjusted total asset turnover = Revenue ÷ Adjusted total assets
= 79,591 ÷ 118,166 = 0.67

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 2016 to 2017 but then slightly improved 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 (USD $ in millions)
Total assets 123,382  125,356  117,470  110,495  117,532 
Total IBM stockholders’ equity 16,796  17,594  18,246  14,262  11,868 
Ratio
Financial leverage1 7.35 7.12 6.44 7.75 9.90
Adjusted for Deferred Taxes
Selected Financial Data (USD $ in millions)
Adjusted total assets 118,166  120,494  112,246  105,673  110,680 
Adjusted total IBM stockholders’ equity 15,276  13,278  13,447  9,693  5,323 
Ratio
Adjusted financial leverage2 7.74 9.07 8.35 10.90 20.79

Based on: 10-K (filing date: 2019-02-26), 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).

2018 Calculations

1 Financial leverage = Total assets ÷ Total IBM stockholders’ equity
= 123,382 ÷ 16,796 = 7.35

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted total IBM stockholders’ equity
= 118,166 ÷ 15,276 = 7.74

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 increased from 2016 to 2017 but then declined significantly 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 (USD $ in millions)
Net income attributable to IBM 8,728  5,753  11,872  13,190  12,022 
Total IBM stockholders’ equity 16,796  17,594  18,246  14,262  11,868 
Ratio
ROE1 51.96% 32.70% 65.07% 92.48% 101.30%
Adjusted for Deferred Taxes
Selected Financial Data (USD $ in millions)
Adjusted net income attributable to IBM 9,427  5,061  10,903  13,863  11,757 
Adjusted total IBM stockholders’ equity 15,276  13,278  13,447  9,693  5,323 
Ratio
Adjusted ROE2 61.71% 38.12% 81.08% 143.02% 220.87%

Based on: 10-K (filing date: 2019-02-26), 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).

2018 Calculations

1 ROE = 100 × Net income attributable to IBM ÷ Total IBM stockholders’ equity
= 100 × 8,728 ÷ 16,796 = 51.96%

2 Adjusted ROE = 100 × Adjusted net income attributable to IBM ÷ Adjusted total IBM stockholders’ equity
= 100 × 9,427 ÷ 15,276 = 61.71%

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 2016 to 2017 but then improved from 2017 to 2018 not reaching 2016 level.

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 (USD $ in millions)
Net income attributable to IBM 8,728  5,753  11,872  13,190  12,022 
Total assets 123,382  125,356  117,470  110,495  117,532 
Ratio
ROA1 7.07% 4.59% 10.11% 11.94% 10.23%
Adjusted for Deferred Taxes
Selected Financial Data (USD $ in millions)
Adjusted net income attributable to IBM 9,427  5,061  10,903  13,863  11,757 
Adjusted total assets 118,166  120,494  112,246  105,673  110,680 
Ratio
Adjusted ROA2 7.98% 4.20% 9.71% 13.12% 10.62%

Based on: 10-K (filing date: 2019-02-26), 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).

2018 Calculations

1 ROA = 100 × Net income attributable to IBM ÷ Total assets
= 100 × 8,728 ÷ 123,382 = 7.07%

2 Adjusted ROA = 100 × Adjusted net income attributable to IBM ÷ Adjusted total assets
= 100 × 9,427 ÷ 118,166 = 7.98%

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 2016 to 2017 but then improved from 2017 to 2018 not reaching 2016 level.