Nike 2012 Annual Report Download - page 56

PART II
Deferred tax assets and (liabilities) are comprised of the following:
May 31,
(In millions) 2012 2011
Deferred tax assets:
Allowance for doubtful accounts $18$19
Inventories 40 63
Sales return reserves 85 72
Deferred compensation 177 152
Stock-based compensation 144 148
Reserves and accrued liabilities 68 66
Foreign loss carry-forwards 76 60
Foreign tax credit carry-forwards 216 236
Hedges —21
Undistributed earnings of foreign subsidiaries 82 —
Other 71 86
Total deferred tax assets 977 923
Valuation allowance (81) (51)
Total deferred tax assets after valuation allowance 896 872
Deferred tax liabilities:
Undistributed earnings of foreign subsidiaries — (40)
Property, plant and equipment (186) (151)
Intangibles (98) (97)
Other (21) (21)
Total deferred tax liability (305) (309)
NET DEFERRED TAX ASSET $ 591 $ 563
The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits, excluding interest and penalties:
May 31,
(In millions) 2012 2011 2010
Unrecognized tax benefits, as of the beginning of the period $ 212 $ 282 $ 274
Gross increases related to prior period tax positions 48 13 87
Gross decreases related to prior period tax positions (25) (98) (122)
Gross increases related to current period tax positions 91 59 52
Gross decreases related to current period tax positions (1) (6) —
Settlements (20) (43) (3)
Lapse of statute of limitations (9) (8) (9)
Changes due to currency translation (11) 13 3
UNRECOGNIZED TAX BENEFITS, AS OF THE END OF THE PERIOD $ 285 $ 212 $ 282
As of May 31, 2012, the total gross unrecognized tax benefits, excluding
related interest and penalties, were $285 million, $165 million of which would
affect the Company’s effective tax rate if recognized in future periods.
The Company recognizes interest and penalties related to income tax matters
in income tax expense. The liability for payment of interest and penalties
increased $17 million, $10 million, and $6 million during the years ended
May 31, 2012, 2011, and 2010, respectively. As of May 31, 2012 and 2011,
accrued interest and penalties related to uncertain tax positions were $108
million and $91 million, respectively (excluding federal benefit).
The Company is subject to taxation primarily in the U.S., China, the
Netherlands, and Brazil, as well as various state and other foreign
jurisdictions. The Company has concluded substantially all U.S. federal
income tax matters through fiscal year 2010. The Company is currently under
audit by the Internal Revenue Service for the 2011 and 2012 tax years. The
Company’s major foreign jurisdictions, China, the Netherlands and Brazil,
have concluded substantially all income tax matters through calendar 2001,
fiscal 2006 and calendar 2004, respectively. The Company estimates that it is
reasonably possible that the total gross unrecognized tax benefits could
decrease by up to $58 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 indefinitely reinvested approximately $5.5 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. The
amount of unrecognized deferred tax liability associated with the indefinitely
reinvested undistributed earnings at May 31, 2012 is $1.8 billion.
A portion of the Company’s foreign operations are benefitting from tax
holidays that will phase out in fiscal 2019 and fiscal 2021. These tax holidays
may be extended when certain conditions are met or may be terminated early
if certain conditions are not met. The decrease in income tax expense for the
year ended May 31, 2012 as a result of these arrangements was
approximately $103 million ($0.22 per diluted share) and $36 million ($0.07
per diluted share) for the year ended May 31, 2011.
Deferred tax assets at May 31, 2012 and 2011 were reduced by a valuation
allowance relating to tax benefits of certain subsidiaries with operating losses.
The net change in the valuation allowance was an increase of $30 million and
$15 million for the years ended May 31, 2012 and 2011, respectively.
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