FASB FASB Interpretation Interpretation

No. 48No. 48An Interpretation of FASB An Interpretation of FASB

Statement No. 109Statement No. 109

Royce W. MitchellRoyce W. Mitchell

Purpose and ObjectivesPurpose and Objectives

Reasons for issuance Reasons for issuance The scope of the interpretationThe scope of the interpretation The The Two-StepTwo-Step process process

Recognition and the “more-likely-than-Recognition and the “more-likely-than-not” benchmarknot” benchmark

Measurement of benefit to be recognizedMeasurement of benefit to be recognized Disclosure requirementsDisclosure requirements Effective date and transitionEffective date and transition

Reasons for IssuanceReasons for Issuance

Statement 109 contains no specific Statement 109 contains no specific guidance on uncertaintyguidance on uncertainty

Significant diversity in practiceSignificant diversity in practice ““Lowest common denominator” Lowest common denominator”

accountingaccounting

ScopeScope

All tax positions accounted for under All tax positions accounted for under Statement 109Statement 109

Applies to past returns filed and Applies to past returns filed and future returns to be filedfuture returns to be filed

Federal and state income tax Federal and state income tax positionspositions

Interim and annual periodsInterim and annual periods

Two-Step ProcessTwo-Step Process

RecognitionRecognition ““More-likely-than-not” standardMore-likely-than-not” standard

Likelihood of more than 50 percent that the tax Likelihood of more than 50 percent that the tax position will be upheld upon examinationposition will be upheld upon examination

Requires positive assertion by CompanyRequires positive assertion by Company Considers facts, circumstances and information Considers facts, circumstances and information

available at reporting dateavailable at reporting date Presumes examination and consideration of Presumes examination and consideration of

precedentsprecedents Each position examined on its on – no offsetsEach position examined on its on – no offsets Determination of “unit-of-measure”Determination of “unit-of-measure”

Two-Step ProcessTwo-Step Process

MeasurementMeasurement Largest amount of tax benefit that Largest amount of tax benefit that

meets the more-likely-than-not standardmeets the more-likely-than-not standard Considers amounts and probabilities of Considers amounts and probabilities of

outcomes that could be realizedoutcomes that could be realized Measurement done within unit of Measurement done within unit of

measure for each tax positionmeasure for each tax position

Measurement ExampleMeasurement Example

Possible Benefit Possible Benefit OutcomeOutcome

Percentage Probability of Percentage Probability of Successful OutcomeSuccessful Outcome

Cumulative Percentage Cumulative Percentage Probability of SuccessProbability of Success

$100 (Complete success $100 (Complete success in settlement or in settlement or

litigation with IRS)litigation with IRS)10%10% 10%10%

$80 (very favorable $80 (very favorable compromise)compromise) 20%20% 30%30%

$60 (fair compromise)$60 (fair compromise) 25%25% 55%55%

$40 (unfavorable $40 (unfavorable compromise)compromise) 30%30% 85%85%

$0 (total loss)$0 (total loss) 15%15% 100%100%

Other ConsiderationOther Consideration

Tax planning strategiesTax planning strategies Subsequent changes in circumstanceSubsequent changes in circumstance

MLTN threshold metMLTN threshold met Tax matter settledTax matter settled Statute of limitations passedStatute of limitations passed

Changes in JudgmentChanges in Judgment

Result of evaluation of new Result of evaluation of new informationinformation

Not from new evaluation or new Not from new evaluation or new interpretation by managementinterpretation by management

Discreet item in period change Discreet item in period change occursoccurs

Interest and PenaltiesInterest and Penalties

Start accruing interest in first period Start accruing interest in first period required by relevant tax lawrequired by relevant tax law

Penalties accrued if position does Penalties accrued if position does not meet minimum statutory not meet minimum statutory requirementrequirement

ClassificationClassification

Liability associated with aggressive Liability associated with aggressive tax position tax position notnot deferred tax liability deferred tax liability

Classified as current or long-term Classified as current or long-term like any other liabilitylike any other liability

Accounting policy elections-Accounting policy elections- Interest classified as interest or income Interest classified as interest or income

tax tax Penalties classified as income tax or Penalties classified as income tax or

another expense classification another expense classification

DisclosuresDisclosures Tabular disclosureTabular disclosure Unrecognized tax benefits that would affect the Unrecognized tax benefits that would affect the

effective tax rateeffective tax rate Interest and penalties recognized in income Interest and penalties recognized in income

statementstatement Reasonably possible changes in unrecognized Reasonably possible changes in unrecognized

benefits in next 12 monthsbenefits in next 12 months Nature of uncertainty and event in next 12 monthsNature of uncertainty and event in next 12 months Range of reasonably possible changeRange of reasonably possible change

Tax years subject to examination by tax yearTax years subject to examination by tax year Policy on classification of interest and penaltiesPolicy on classification of interest and penalties

Tabular DisclosureTabular Disclosure

Tabular reconciliation for each period Tabular reconciliation for each period presentedpresented Gross amounts of increases/decreases in Gross amounts of increases/decreases in

unrecognized tax benefits as a result of tax unrecognized tax benefits as a result of tax positions taken in positions taken in prior yearsprior years

Gross amounts of increases/decreases in Gross amounts of increases/decreases in unrecognized tax benefits as a result of tax unrecognized tax benefits as a result of tax positions taken in positions taken in current yearcurrent year

Decreases in unrecognized tax benefits as a result Decreases in unrecognized tax benefits as a result of settlements with taxing authoritiesof settlements with taxing authorities

Decreases in unrecognized tax benefits due to Decreases in unrecognized tax benefits due to lapse of statute of limitationslapse of statute of limitations

DisclosuresDisclosures Tabular disclosureTabular disclosure Unrecognized tax benefits that would affect the Unrecognized tax benefits that would affect the

effective tax rateeffective tax rate Interest and penalties recognized in income Interest and penalties recognized in income

statementstatement Reasonably possible changes in unrecognized Reasonably possible changes in unrecognized

benefits in next 12 monthsbenefits in next 12 months Nature of uncertainty and event in next 12 monthsNature of uncertainty and event in next 12 months Range of reasonably possible changeRange of reasonably possible change

Tax years subject to examination by tax yearTax years subject to examination by tax year Policy on classification of interest and penaltiesPolicy on classification of interest and penalties

Illustrative Disclosure – Illustrative Disclosure – pp A33pp A33

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2001. The Internal Revenue local, or non-U.S. income tax examinations by tax authorities for years before 2001. The Internal Revenue Service (IRS) commenced an examination of the Company’s U.S. income tax returns for 2002 through 2004 Service (IRS) commenced an examination of the Company’s U.S. income tax returns for 2002 through 2004 in the first quarter of 2007 that is anticipated to be completed by the end of 2008. As of December 31, 2007, in the first quarter of 2007 that is anticipated to be completed by the end of 2008. As of December 31, 2007, the IRS has proposed certain significant adjustments to the Company’s transfer pricing and research credits the IRS has proposed certain significant adjustments to the Company’s transfer pricing and research credits tax positions. Management is currently evaluating those proposed adjustments to determine if it agrees, but tax positions. Management is currently evaluating those proposed adjustments to determine if it agrees, but if accepted, the Company does not anticipate the adjustments would result in a material change to its if accepted, the Company does not anticipate the adjustments would result in a material change to its financial position. However, the Company anticipates that it is reasonably possible that an additional financial position. However, the Company anticipates that it is reasonably possible that an additional payment in the range of $80 to $100 million will be made by the end of 2008.payment in the range of $80 to $100 million will be made by the end of 2008.

The Company adopted the provisions of FASB Interpretation No. 48, The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of Interpretation 48, the Company recognized on January 1, 2007. As a result of the implementation of Interpretation 48, the Company recognized approximately a $200 million increase in the liability for unrecognized tax benefits, which was accounted for approximately a $200 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007, balance of retained earnings. A reconciliation of the beginning and as a reduction to the January 1, 2007, balance of retained earnings. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:ending amount of unrecognized tax benefits is as follows:

(in millions)

Balance at January 1, 2006 $370,000 Additions based on tax positions related to the current year 10,000

Additions for tax positions of prior years 30,000Reductions for tax positions of prior years (60,000)Settlements (40,000)Balance at December 31, 2007 $310,000 ======

Included in the balance at December 31, 2007, are $60 million of tax positions for which the ultimate Included in the balance at December 31, 2007, are $60 million of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.of cash to the taxing authority to an earlier period.

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the years ended December 31, 2007, 2006, and 2005, the Company in operating expenses. During the years ended December 31, 2007, 2006, and 2005, the Company recognized approximately $10, $11, and $12 million in interest and penalties. The Company had recognized approximately $10, $11, and $12 million in interest and penalties. The Company had approximately $60 and $50 million for the payment of interest and penalties accrued at December 31, 2007, approximately $60 and $50 million for the payment of interest and penalties accrued at December 31, 2007, and 2006, respectively.and 2006, respectively.

Effective Date and Effective Date and TransitionTransition

Fiscal years beginning after Fiscal years beginning after December 15, 2006December 15, 2006

Earlier adoption encouragedEarlier adoption encouraged Cumulative effect applied to opening Cumulative effect applied to opening

retained earningsretained earnings Disclosure in balance sheet Disclosure in balance sheet onlyonly in in

year of adoptionyear of adoption

Consideration and Near Consideration and Near Term Actions StepsTerm Actions Steps

Senior management and the board should Senior management and the board should considerconsider Does the Company have adequate internal controls Does the Company have adequate internal controls

to support the process of identifying and continually to support the process of identifying and continually evaluating all tax positions?evaluating all tax positions?

Does the Company have sufficiently competent Does the Company have sufficiently competent personnel to perform control procedures and oversee personnel to perform control procedures and oversee processes?processes?

Is use of outside professionals adequate to achieve Is use of outside professionals adequate to achieve adequate control procedures and overcome lack of adequate control procedures and overcome lack of internal trained personnel?internal trained personnel?

What outside professionals to consult? Tax What outside professionals to consult? Tax professional with audit firm or not?professional with audit firm or not?

Consideration and Near Consideration and Near Term Actions StepsTerm Actions Steps

Need to begin process of identifying Need to begin process of identifying all tax positions all tax positions

Disclosure considerations for Disclosure considerations for 12/31/06 financial statements12/31/06 financial statements

Work needs to be completed, at a Work needs to be completed, at a minimum, prior to reporting on 1minimum, prior to reporting on 1stst quarter of 2007 for public companiesquarter of 2007 for public companies

Private companies have more timePrivate companies have more time

ConsequencesConsequences

Less flexibility for management in Less flexibility for management in determining reserves for tax exposuresdetermining reserves for tax exposures

Increased disclosure to public of tax Increased disclosure to public of tax exposures exposures Could trigger detailed questions from analystsCould trigger detailed questions from analysts Attention from IRS?Attention from IRS?

Greater income statement volatility as Greater income statement volatility as managements assessments of issues managements assessments of issues changeschanges

Will it make companies more risk averse?Will it make companies more risk averse?

SEC GuidanceSEC Guidance

No preferability letter for change in No preferability letter for change in classification of interest and penaltiesclassification of interest and penalties

Tabular presentation not required until Tabular presentation not required until year-endyear-end

ReviewReview

Reasons for issuance Reasons for issuance The scope of the interpretationThe scope of the interpretation The The Two-StepTwo-Step process process

Recognition and the “more-likely-than-Recognition and the “more-likely-than-not” benchmarknot” benchmark

Measurement of benefit to be recognizedMeasurement of benefit to be recognized Disclosure requirementsDisclosure requirements Effective date and transitionEffective date and transition

QuestionsQuestions