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49NIKE,INC.-Form10-K
PARTII
Note9Income Taxes
Deferred tax assets and (liabilities) are comprised of the following:
(Inmillions)
May31,
2011 2010
Deferred tax assets:
Allowance for doubtful accounts $ 19 $ 17
Inventories 63 47
Sales return reserves 72 52
Deferred compensation 152 144
Stock-based compensation 148 145
Reserves and accrued liabilities 66 86
Foreign loss carry-forwards 60 26
Foreign tax credit carry-forwards 236 148
Hedges 21 1
Undistributed earnings of foreign subsidiaries — 128
Other 86 37
Total deferred tax assets 923 831
Valuation allowance (51) (36)
Total deferred tax assets after valuation allowance 872 795
Deferred tax liabilities:
Undistributed earnings of foreign subsidiaries (40) —
Property, plant and equipment (151) (99)
Intangibles (97) (99)
Hedges (1) (72)
Other (20) (8)
Total deferred tax liability (309) (278)
NET DEFERRED TAX ASSET $ 563 $ 517
The following is a reconciliation of the changes in the gross balance of unrecognized tax benefi ts:
(Inmillions)
May31,
2011 2010 2009
Unrecognized tax benefi ts, as of the beginning of the period $ 282 $ 274 $ 251
Gross increases related to prior period tax positions 13 87 53
Gross decreases related to prior period tax positions (98) (122) (62)
Gross increases related to current period tax positions 59 52 72
Gross decreases related to current period tax positions (6) — —
Settlements (43) (3) (29)
Lapse of statute of limitations (8) (9) (4)
Changes due to currency translation 13 3 (7)
UNRECOGNIZED TAX BENEFITS, AS OF THE END OF THE PERIOD $ 212 $ 282 $ 274
As of May31,2011, the total gross unrecognized tax benefi ts, excluding related
interest and penalties, were $212million, $93million of which would affect
the Company’s effective tax rate if recognized in future periods. Total gross
unrecognized tax benefi ts, excluding interest and penalties, as of May31,2010
and 2009 was $282million and $274million, respectively.
The Company recognizes interest and penalties related to income tax matters
in income tax expense. The liability for payment of interest and penalties
increased $10million, $6million, and $2million during theyears ended
May31,2011,2010, and 2009, respectively. As of May31,2011 and 2010,
accrued interest and penalties related to uncertain tax positions was $91million
and $81million, respectively (excluding federal benefi t).
The Company is subject to taxation primarily in the U.S., China and the
Netherlands as well as various state and other foreign jurisdictions. The Company
has concluded substantially all U.S. federal income tax matters through fi scal
year 2009. The Company is currently under audit by the Internal Revenue
Service for the 2010 tax year. The Company’s major foreign jurisdictions,
China and the Netherlands, have concluded substantially all income tax
matters through calendar 2000 and fi scal 2005, respectively. The Company
estimates that it is reasonably possible that the total gross unrecognized tax
benefi ts could decrease by up to $69million within the next 12months as a
result of resolutions of global tax examinations and the expiration of applicable
statutes of limitations.
The Company has indefi nitely reinvested approximately $4.4billion of the
cumulative undistributed earnings of certain foreign subsidiaries. Such earnings
would be subject to U.S. taxation if repatriated to the U.S. Determination of the
amount of unrecognized deferred tax liability associated with the indefi nitely
reinvested cumulative undistributed earnings is not practicable.
A portion of the Company’s foreign operations are benefi tting from a tax
holiday that will phase out in 2019. The decrease in income tax expense for the
year ended May31,2011 as a result of this arrangement was approximately
$36million ($0.07 per diluted share) and $30million ($0.06 per diluted share)
for the year ended May31,2010.
Deferred tax assets at May31,2011 and 2010 were reduced by a valuation
allowance relating to tax benefi ts of certain subsidiaries with operating losses
where it is more likely than not that the deferred tax assets will not be realized.
The net change in the valuation allowancewas an increase of $15million and
$10million for theyears ended May31,2011 and 2010, respectively and a
decrease of $15million for the year ended May31,2009.