Pfizer 2005 Annual Report Download - page 50

2005 Financial Report 49
Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies
Valuation allowances are provided when we believe that our
deferred tax assets are not recoverable based on an assessment
of estimated future taxable income that incorporates ongoing,
prudent, feasible tax planning strategies.
Deferred tax assets and liabilities in the preceding table, netted
by taxing jurisdiction, are in the following captions in the
consolidated balance sheet:
AS OF DEC. 31,
__________________________________
(MILLIONS OF DOLLARS) 2005 2004
Current deferred tax asset(a) $2,231 $1,461
Noncurrent deferred tax asset(b) 721 397
Current deferred tax liability(c) (806) (4)
Noncurrent deferred tax liability(d) (10,240) (12,026)
Net deferred tax liability $(8,094) $(10,172)
(a) Included in Prepaid expenses and taxes.
(b) Included in Other assets, deferred taxes and deferred charges.
(c) Included in Other current liabilities.
(d) Included in Deferred taxes.
Areclassification was made in 2004 to conform to the 2005
presentation, as well as to better reflect jurisdictional netting.
D. Tax Contingencies
We are subject to income tax in many jurisdictions and a certain
degree of estimation is required in recording the assets and
liabilities related to income taxes. Tax accruals are provided when
we believe that it is not probable that the Company’s position will
be sustained if challenged.
In 2005, we recorded a tax benefit of $586 million primarily related
to the resolution of certain tax positions of the Pfizer Inc. tax
returns for the years 1999 through 2001 and the Warner-Lambert
Company tax returns for the years 1999 through the date of the
merger with Pfizer (June19, 2000). In connection with those audits,
as of December 31, 2005, we were in the process of appealing one
matter related to the tax deductibility of a breakup fee paid by
Warner-Lambert Company in 2000. On January 25, 2006, the Company
was notified by the Internal Revenue Service (IRS) Appeals Division that
resolution had been reached on the Warner-Lambert Company break-
up fee issue. This resolution finalizes the IRS’ audit of the Company’s
tax returns for Pfizer Inc. for the years 1999 through 2001 and Warner-
Lambert Company for the years 1999 through the date of merger. As
a result, in the first quarter of 2006 we will record favorable
adjustments of approximately $450 million related to the resolution
of this issue.
The IRS is currently conducting audits of the Pfizer Inc. tax returns for
the years 2002, 2003 and 2004. The 2005 and 2006 tax years are also
currently under audit under the IRS Compliance Assurance Process
(CAP).
As previously disclosed, with respect to Pharmacia (formerly known
as Monsanto Company), the IRS is currently conducting audits of the
tax returns for the years 2000 through the date of merger with
Pfizer (April 16, 2003).
We believe that our accruals for tax liabilities are adequate for all
open years. We consider many factors in making these assessments,
including past history, recent interpretations of tax law, and the
specifics of each matter. Because tax regulations are subject to
interpretation and tax litigation is inherently uncertain, these
assessments can involve a series of complex judgments about future
events and can rely heavily on estimates and assumptions (see Note
1B, Significant Accounting Policies: Estimates and Assumptions). Our
assessments are based on estimates and assumptions that have been
deemed reasonable by management. However, if our estimates are
not representative of actual outcomes, our results could be materially
affected. Because of complexity, we cannot estimate the range of
reasonably possible loss in excess of amounts recorded.
8. Other Comprehensive Income
Changes, net of tax, in accumulated other comprehensive income/(expense) follow:
NET UNREALIZED NET UNREALIZED ACCUMULATED
CURRENCY GAINS/(LOSSES) GAIN/(LOSS) OTHER COM-
TRANSLATION ON DERIVATIVE ON AVAILABLE- MINIMUM PREHENSIVE
ADJUSTMENT FINANCIAL FOR-SALE PENSION INCOME/
(MILLIONS OF DOLLARS) AND OTHER INSTRUMENTS SECURITIES LIABILITY (EXPENSE)
Balance, January 1, 2003 $(1,448) $ 10 $ 70 $(507) $(1,875)
Period change 2,028 42 68 (68) 2,070
Balance, December 31, 2003 580 52 138 (575) 195
Period change 2,014 (53) 128 (6) 2,083
Balance, December 31, 2004 2,594 (1) 266 (581) 2,278
Period change (1,481) (106) (183) (29) (1,799)
Balance, December 31, 2005 $ 1,113 $(107) $ 83 $(610) $ 479
Income taxes related to the above components of other
comprehensive income/(expense) are not significant in any year.
Income taxes are not provided for foreign currency translation
relating to permanent investments in international subsidiaries.
Reclassification adjustments for realized gains on available-for-sale
securities included in net income, net of tax, were $169 million
in 2005 (largely due to the sale of certain equity investments), $15
million in 2004 and $6 million in 2003. All other reclassification
adjustments are not significant in any year.