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Analysis of Income Taxes

Difficulty: Advanced


Income Tax Accounting Policy

Income Tax Uncertainties

McDonald's, like other multi-national companies, is regularly audited by federal, state and foreign tax authorities, and tax assessments may arise several years after tax returns have been filed. Accordingly, tax liabilities are recorded when, in management's judgment, a tax position does not meet the more likely than not threshold for recognition. For tax positions that meet the more likely than not threshold, a tax liability may still be recorded depending on management's assessment of how the tax position will ultimately be settled.

McDonald's records interest and penalties on unrecognized tax benefits in the provision for income taxes.

Accounting for Global Intangible Low-Taxed Income ("GILTI")

The Tax Act requires a U.S. shareholder of a foreign corporation to include GILTI in taxable income. The accounting policy of McDonald's is to record any tax on GILTI in the provision for income taxes in the year it is incurred.

Source: McDonald's Corp., Annual Report


Income Tax Expense (Benefit)

McDonald's Corp., income tax expense (benefit), continuing operations

USD $ in thousands

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12 months ended Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
U.S. federal 2,030,800  1,046,600  1,072,300  1,124,800  1,238,200 
U.S. state 169,800  121,300  139,500  148,400  175,000 
Outside the U.S. 1,217,000  1,550,200  816,000  1,431,700  1,180,200 
Current tax provision 3,417,600  2,718,100  2,027,800  2,704,900  2,593,400 
U.S. federal (120,100) (122,100) 6,800  (81,800) 46,200 
U.S. state 12,800  14,100  (3,900) (6,200) (6,700)
Outside the U.S. 70,900  (430,600) (4,300) (2,700) (14,300)
Deferred tax provision (benefit) (36,400) (538,600) (1,400) (90,700) 25,200 
Provision for income taxes 3,381,200  2,179,500  2,026,400  2,614,200  2,618,600 

Source: Based on data from McDonald's Corp. Annual Reports

Item Description The company
Current tax provision 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. McDonald's Corp.'s current tax provision increased from 2015 to 2016 and from 2016 to 2017.
Deferred tax provision (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. McDonald's Corp.'s deferred tax provision (benefit) declined from 2015 to 2016 but then increased from 2016 to 2017 not reaching 2015 level.
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. McDonald's Corp.'s provision for income taxes increased from 2015 to 2016 and from 2016 to 2017.

Effective Income Tax Rate (EITR)

McDonald's Corp., effective income tax rate (EITR) reconciliation

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Statutory U.S. federal income tax rate 35.00% 35.00% 35.00% 35.00% 35.00%
State income taxes, net of related federal income tax benefit 1.20% 1.50% 1.60% 1.60% 1.30%
Foreign income taxed at different rates -4.60% -6.50% -4.90% -4.80% -5.10%
Transition tax 13.70% % % % %
US net deferred tax liability remeasurement -6.00% % % % %
Cash repatriation 0.30% % -2.30% -1.20% -0.50%
Other, net -0.20% 1.70% 1.50% 4.90% 1.20%
Effective income tax rates 39.40% 31.70% 30.90% 35.50% 31.90%

Source: Based on data from McDonald's Corp. Annual Reports

Item Description The company
Effective income tax rates 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. McDonald's Corp.'s effective income tax rates increased from 2015 to 2016 and from 2016 to 2017.

Components of Deferred Tax Assets and Liabilities

McDonald's Corp., components of deferred tax assets and liabilities

USD $ in thousands

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Property and equipment 633,800  650,200  472,700  394,400  407,900 
Employee benefit plans 253,100  395,000  390,100  400,300  388,900 
Intangible assets 228,800  170,700  222,600  252,200  210,100 
Deferred foreign tax credits 208,600  316,800  289,200  272,900  192,300 
Operating loss carryforwards 71,100  292,700  419,800  286,500  154,000 
Other 266,000  338,600  297,000  331,200  347,600 
Deferred tax assets before valuation allowance 1,661,400  2,164,000  2,091,400  1,937,500  1,700,800 
Valuation allowance (163,200) (168,000) (322,400) (287,900) (172,800)
Deferred tax assets 1,498,200  1,996,000  1,769,000  1,649,600  1,528,000 
Property and equipment (1,211,500) (1,459,800) (1,751,700) (1,754,600) (1,812,400)
Unrealized foreign exchange gains (630,900) (455,600)
Intangible liabilities (296,200) (445,200) (464,700)
Other (242,000) (287,600) (268,500) (907,000) (639,800)
Deferred tax liabilities (1,749,700) (2,823,500) (2,940,500) (2,661,600) (2,452,200)
Net deferred tax assets (liabilities) (251,500) (827,500) (1,171,500) (1,012,000) (924,200)

Source: Based on data from McDonald's Corp. Annual Reports

Item Description The company
Deferred tax assets before valuation allowance 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. McDonald's Corp.'s deferred tax assets before valuation allowance increased from 2015 to 2016 but then declined significantly from 2016 to 2017.
Deferred tax assets 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. McDonald's Corp.'s deferred tax assets increased from 2015 to 2016 but then declined significantly 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. McDonald's Corp.'s net deferred tax assets (liabilities) increased from 2015 to 2016 and from 2016 to 2017.

Deferred Tax Assets and Liabilities, Classification

McDonald's Corp., deferred tax assets and liabilities, classification

USD $ in thousands

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Noncurrent deferred tax liabilities 1,119,400  1,817,100  1,704,300  1,624,500  1,647,700 
Noncurrent deferred tax assets (included in Other assets-miscellaneous) 867,900  804,000  532,800  591,200  621,400 
Current deferred tax liabilities (included in Liabilities of businesses held for sale) (185,600)
Current deferred tax assets (included in Current assets-prepaid expenses and other current assets) 21,300  102,100 

Source: Based on data from McDonald's Corp. Annual Reports

Item Description The company
Noncurrent deferred tax liabilities Represents the noncurrent portion of deferred tax liabilities, which result from applying the applicable tax rate to net taxable temporary differences pertaining to each jurisdiction to which the entity is obligated to pay income tax. A noncurrent taxable temporary difference is a difference between the tax basis and the carrying amount of a noncurrent asset or liability in the financial statements prepared in accordance with generally accepted accounting principles. In a classified statement of financial position, an enterprise shall separate deferred tax liabilities and assets into a current amount and a noncurrent amount. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. McDonald's Corp.'s noncurrent deferred tax liabilities increased from 2015 to 2016 but then declined significantly from 2016 to 2017.
Noncurrent deferred tax assets (included in Other assets-miscellaneous) The noncurrent portion as of the balance sheet date of the aggregate carrying amount 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; after the valuation allowance, if any, to reduce such amount to net realizable value. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. McDonald's Corp.'s noncurrent deferred tax assets (included in Other assets-miscellaneous) increased from 2015 to 2016 and from 2016 to 2017.
Current deferred tax liabilities (included in Liabilities of businesses held for sale) Represents the current portion of deferred tax liabilities, which result from applying the applicable tax rate to net taxable temporary differences pertaining to each jurisdiction to which the entity is obligated to pay income tax. A current taxable temporary difference is a difference between the tax basis and the carrying amount of a current asset or liability in the financial statements prepared in accordance with generally accepted accounting principles. In a classified statement of financial position, an enterprise shall separate deferred tax liabilities and assets into a current amount and a noncurrent amount. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference.
Current deferred tax assets (included in Current assets-prepaid expenses and other current assets) The current portion of 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; after deducting the allocated valuation allowance, if any, to reduce such amount to net realizable value. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. An unrecognized tax benefit that is directly related to a position taken in a tax year that results in a net operating loss carryforward should be presented as a reduction of the related deferred tax asset.

Analyst Adjustments: Removal of Deferred Taxes

McDonald's Corp., adjustments to financial data

USD $ in thousands

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) 5,327,200  4,848,600  9,643,000  4,185,500  5,050,100 
Less: Current deferred tax assets, net 21,300  102,100 
Current assets (adjusted) 5,327,200  4,848,600  9,643,000  4,164,200  4,948,000 
Adjustment to Total Assets
Total assets (as reported) 33,803,700  31,023,900  37,938,700  34,281,400  36,626,300 
Less: Current deferred tax assets, net 21,300  102,100 
Less: Noncurrent deferred tax assets, net 867,900  804,000  532,800  591,200  621,400 
Total assets (adjusted) 32,935,800  30,219,900  37,405,900  33,668,900  35,902,800 
Adjustment to Current Liabilities
Current liabilities (as reported) 2,890,600  3,468,300  2,950,400  2,747,900  3,170,000 
Less: Current deferred tax liabilities, net (185,600)
Current liabilities (adjusted) 2,890,600  3,653,900  2,950,400  2,747,900  3,170,000 
Adjustment to Total Liabilities
Total liabilities (as reported) 37,071,700  33,228,200  30,850,800  21,428,000  20,616,600 
Less: Current deferred tax liabilities, net (185,600)
Less: Noncurrent deferred tax liabilities, net 1,119,400  1,817,100  1,704,300  1,624,500  1,647,700 
Total liabilities (adjusted) 35,952,300  31,596,700  29,146,500  19,803,500  18,968,900 
Adjustment to Shareholders' Equity (deficit)
Shareholders' equity (deficit) (as reported) (3,268,000) (2,204,300) 7,087,900  12,853,400  16,009,700 
Less: Net deferred tax assets (liabilities) (251,500) (827,500) (1,171,500) (1,012,000) (924,200)
Shareholders' equity (deficit) (adjusted) (3,016,500) (1,376,800) 8,259,400  13,865,400  16,933,900 
Adjustment to Net Income
Net income (as reported) 5,192,300  4,686,500  4,529,300  4,757,800  5,585,900 
Add: Deferred income tax expense (benefit) (36,400) (538,600) (1,400) (90,700) 25,200 
Net income (adjusted) 5,155,900  4,147,900  4,527,900  4,667,100  5,611,100 

Adjusted Ratios: Removal of Deferred Taxes (Summary)

McDonald's 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 1.84 1.40 3.27 1.52 1.59
Adjusted current ratio 1.84 1.33 3.27 1.52 1.56
Net Profit Margin
Reported net profit margin 22.75% 19.03% 17.82% 17.34% 19.87%
Adjusted net profit margin 22.59% 16.85% 17.82% 17.01% 19.96%
Total Asset Turnover
Reported total asset turnover 0.68 0.79 0.67 0.80 0.77
Adjusted total asset turnover 0.69 0.81 0.68 0.82 0.78
Financial Leverage
Reported financial leverage 5.35 2.67 2.29
Adjusted financial leverage 4.53 2.43 2.12
Return on Equity (ROE)
Reported ROE % % 63.90% 37.02% 34.89%
Adjusted ROE % % 54.82% 33.66% 33.14%
Return on Assets (ROA)
Reported ROA 15.36% 15.11% 11.94% 13.88% 15.25%
Adjusted ROA 15.65% 13.73% 12.10% 13.86% 15.63%
Ratio Description The company
Adjusted current ratio A liquidity ratio calculated as adjusted current assets divided by adjusted current liabilities. McDonald's Corp.'s adjusted current ratio deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by total revenue. McDonald's Corp.'s adjusted net profit margin deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. McDonald's Corp.'s adjusted total asset turnover improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017 not reaching 2015 level.
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.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. McDonald's Corp.'s adjusted ROA improved from 2015 to 2016 and from 2016 to 2017.

Adjusted Current Ratio

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Current assets (USD $ in thousands) 5,327,200  4,848,600  9,643,000  4,185,500  5,050,100 
Current liabilities (USD $ in thousands) 2,890,600  3,468,300  2,950,400  2,747,900  3,170,000 
Current ratio1 1.84 1.40 3.27 1.52 1.59
Adjusted for Deferred Taxes
Adjusted current assets (USD $ in thousands) 5,327,200  4,848,600  9,643,000  4,164,200  4,948,000 
Adjusted current liabilities (USD $ in thousands) 2,890,600  3,653,900  2,950,400  2,747,900  3,170,000 
Adjusted current ratio2 1.84 1.33 3.27 1.52 1.56

2017 Calculations

1 Current ratio = Current assets ÷ Current liabilities
= 5,327,200 ÷ 2,890,600 = 1.84

2 Adjusted current ratio = Adjusted current assets ÷ Adjusted current liabilities
= 5,327,200 ÷ 2,890,600 = 1.84

Ratio Description The company
Adjusted current ratio A liquidity ratio calculated as adjusted current assets divided by adjusted current liabilities. McDonald's Corp.'s adjusted current ratio deteriorated from 2015 to 2016 but then slightly improved 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 thousands) 5,192,300  4,686,500  4,529,300  4,757,800  5,585,900 
Revenues (USD $ in thousands) 22,820,400  24,621,900  25,413,000  27,441,300  28,105,700 
Net profit margin1 22.75% 19.03% 17.82% 17.34% 19.87%
Adjusted for Deferred Taxes
Adjusted net income (USD $ in thousands) 5,155,900  4,147,900  4,527,900  4,667,100  5,611,100 
Adjusted net profit margin2 22.59% 16.85% 17.82% 17.01% 19.96%

2017 Calculations

1 Net profit margin = 100 × Net income ÷ Revenues
= 100 × 5,192,300 ÷ 22,820,400 = 22.75%

2 Adjusted net profit margin = 100 × Adjusted net income ÷ Revenues
= 100 × 5,155,900 ÷ 22,820,400 = 22.59%

Ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by total revenue. McDonald's Corp.'s adjusted net profit margin deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

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
Revenues (USD $ in thousands) 22,820,400  24,621,900  25,413,000  27,441,300  28,105,700 
Total assets (USD $ in thousands) 33,803,700  31,023,900  37,938,700  34,281,400  36,626,300 
Total asset turnover1 0.68 0.79 0.67 0.80 0.77
Adjusted for Deferred Taxes
Adjusted total assets (USD $ in thousands) 32,935,800  30,219,900  37,405,900  33,668,900  35,902,800 
Adjusted total asset turnover2 0.69 0.81 0.68 0.82 0.78

2017 Calculations

1 Total asset turnover = Revenues ÷ Total assets
= 22,820,400 ÷ 33,803,700 = 0.68

2 Adjusted total asset turnover = Revenues ÷ Adjusted total assets
= 22,820,400 ÷ 32,935,800 = 0.69

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. McDonald's Corp.'s adjusted total asset turnover improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017 not reaching 2015 level.

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 thousands) 33,803,700  31,023,900  37,938,700  34,281,400  36,626,300 
Shareholders' equity (deficit) (USD $ in thousands) (3,268,000) (2,204,300) 7,087,900  12,853,400  16,009,700 
Financial leverage1 5.35 2.67 2.29
Adjusted for Deferred Taxes
Adjusted total assets (USD $ in thousands) 32,935,800  30,219,900  37,405,900  33,668,900  35,902,800 
Adjusted shareholders' equity (deficit) (USD $ in thousands) (3,016,500) (1,376,800) 8,259,400  13,865,400  16,933,900 
Adjusted financial leverage2 4.53 2.43 2.12

2017 Calculations

1 Financial leverage = Total assets ÷ Shareholders' equity (deficit)
= 33,803,700 ÷ -3,268,000 =

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted shareholders' equity (deficit)
= 32,935,800 ÷ -3,016,500 =

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.

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 thousands) 5,192,300  4,686,500  4,529,300  4,757,800  5,585,900 
Shareholders' equity (deficit) (USD $ in thousands) (3,268,000) (2,204,300) 7,087,900  12,853,400  16,009,700 
ROE1 % % 63.90% 37.02% 34.89%
Adjusted for Deferred Taxes
Adjusted net income (USD $ in thousands) 5,155,900  4,147,900  4,527,900  4,667,100  5,611,100 
Adjusted shareholders' equity (deficit) (USD $ in thousands) (3,016,500) (1,376,800) 8,259,400  13,865,400  16,933,900 
Adjusted ROE2 % % 54.82% 33.66% 33.14%

2017 Calculations

1 ROE = 100 × Net income ÷ Shareholders' equity (deficit)
= 100 × 5,192,300 ÷ -3,268,000 = %

2 Adjusted ROE = 100 × Adjusted net income ÷ Adjusted shareholders' equity (deficit)
= 100 × 5,155,900 ÷ -3,016,500 = %

Ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity.

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 thousands) 5,192,300  4,686,500  4,529,300  4,757,800  5,585,900 
Total assets (USD $ in thousands) 33,803,700  31,023,900  37,938,700  34,281,400  36,626,300 
ROA1 15.36% 15.11% 11.94% 13.88% 15.25%
Adjusted for Deferred Taxes
Adjusted net income (USD $ in thousands) 5,155,900  4,147,900  4,527,900  4,667,100  5,611,100 
Adjusted total assets (USD $ in thousands) 32,935,800  30,219,900  37,405,900  33,668,900  35,902,800 
Adjusted ROA2 15.65% 13.73% 12.10% 13.86% 15.63%

2017 Calculations

1 ROA = 100 × Net income ÷ Total assets
= 100 × 5,192,300 ÷ 33,803,700 = 15.36%

2 Adjusted ROA = 100 × Adjusted net income ÷ Adjusted total assets
= 100 × 5,155,900 ÷ 32,935,800 = 15.65%

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