Chapter S, Problem 2C

Analyzing Disney’s Income Tax Disclosures

The following questions pertain to Disney’s 2012 financial statements and income taxes footnote shown below.

1. 1. How much did Disney report as income tax expense in fiscal 2012? How much cash did Disney pay during the year for income taxes? In general, why do these numbers differ?
2. 2. What is Disney’s 2012 statutory tax rate? What is its 2012 effective tax rate? In general, why do these rates differ?
3. 3. Why does Disney deduct a “Valuation allowance” from its net deferred tax liability in its income tax footnote?
4. 4. Disney reports a net deferred tax liability of $1,486 million in fiscal 2012. How is this amount reflected on Disney's balance sheet?
5. 5. In its income taxes footnote, speculate as to why Disney reports “depreciable, amortizable and other property” as a deferred tax liability rather than a deferred tax asset.

DISNEY’S 2012 FINANCIAL STATEMENTS

DISNEY’S 2012 FINANCIAL STATEMENTS

Consolidated Statements of Income (in millions, except per share data)
	2012	2011	2010
Revenues	$42,278	$40,893	$38,063
Costs and expenses	(33,115)	(33,112)	(31,337)
Restructuring and impairment charges	(100)	(55)	(270)
Other incomeAexpense). net	239	75	140
Net interest expense	(369)	(343)	(409)
Equity in the income of investees	627	585	440
Income before income taxes	9,260	8,043	6,627
Income taxes	(3,087)	(2,785)	(2,314)
Consolidated Statements of Income (in millions, except per share data)
	2012	2011	2010
Net income	6,173	5,258	4,313
Less: Net income attributable to noncontrolling interests	(491)	(451)	(350)
Net income attributable to Disney	$5,682	$4,807	$3,963
Earnings per share attributable to Disney:
Diluted	$3,13	$2.52	$2.03
Basic	$3,17	$2.56	$2.07
Weighted average number of common and common equivalent shares outstanding: Diluted	1,818	1.909	1.948
Basic	1,794	1.878	1.915

See Notes to Consolidated Financial Statements.

Consolidated Balance Sheets (in millions, except per share data)
	September 29,				October 1,
	2012				2011
ASSETS Current assets Cash and cash equivalents	$3,387			$3,185
Receivables	6,540			6,182
Inventories	1,337			1,595
Television costs	676			674
Deferred income taxes	765			1,487
Other current assets	804			634
Total current assets	13,709			13,757
Film and television costs	4,541			4,357
Investments	2,723			2,435
Parks, resorts and other property, at cost attractions, buildings and equipment	38,382			35,515
Accumulated depreciation	(20,687)			(19,572)
	17,395			15,943
Projects in progress	2,453			2,625
Land	1,164			1,127
	21,312			19,695
Intangible assets, net	5,015			5,121
Goodwill	25,110			24,145
Other assets	2,388			2,614
Total assets	$74,398			$72,124
LIABILITIES AND EQUITY
Current liabilities
Accounts payable and other accrued liabilities		$6,393	$6,362
Current portion of borrowings		3,614	3,055

	September 29. 2012	October 1. 2011
Unearned royalties and other advances	2,806	2,671
Total current liabilities	12,313	12,088
Borrowings	10,697	10,922
Deferred income taxes	,	2,866
Other long-term liabilities Commitments and contingencies (Note 14) Equity Preferred stock. $0.01 par value Authorized—100 million shares.	7,179	6,795
Issued—none Common stock. $0.01 par value Authorized—4.6 billion shares. Issued—2.8 billion shares at September 29.2012. and 2.7 billion
shares at October 1.2011	31,731	30,296
Retained earnings	42,965	38,375
Accumulated other comprehensive loss	(3,366)	(2,630)
	71,430	66,041
Treasury stock, at cost. 1.0 billion shares at September 29, 2012, and 0.9 billion shares at October 1, 2011	(31,671)		(28,656)
Total Disney shareholders' equity	39,759		37,385
Noncontrolling interests	2,199		2,068
Total equity	41,958		39,453
Total liabilities and equity	$74,898		$72,124

See Notes to Consolidated Financial Statements.

Consolidated Statements of Cash Flows (in millions)
	2012	2011	2010
OPERATING ACTIVITIES
Net income	$6,173	$5,258	$4,313
Depreciation and amortization	1,987	1,841	1,713
Gains on acquisitions and dispositions	(184)	(75)	(118)
Deferred income taxes	472	127	133
Equity in the income of investees	(627)	(585)	(440)
Cash distributions received from equity investees	663	608	473
Net change in film and television costs	(52)	332	238
Equity-based compensation	408	423	391
Impairment charges	22	16	132
Other	195	188	9

		2012	2011		2010
Changes in operating assets and liabilities Receivables		(108)	(518)		(686)
Inventories		18	(199)		(127)
Other assets		(151)	(189)		42
Accounts payable and other accrued liabilities		(608)	(367)		649
Income taxes		(242)	134		(144)
Cash provided by operations		7,966	6,994		6,578
INVESTING ACTIVITIES
Investments in parks, resorts, and other property	(3,784)		(3,559)		(2,110)
Proceeds from dispositions	15		564		170
Acquisitions	(1,088)		(184)		(2,493)
Other	98		(107)		(90)
Cash used in investing activities	(4,759)		(3,286)		(4,523)
FINANCING ACTIVITIES Commercial paper borrowings, net		467		393		1,190
Borrowings		3,779		2,350		—
Reduction of borrowings		(3,822)		(1,096)		(1,371)
Dividends		(1,076)		(756)		(653)
Repurchases of common stock		(3,015)		(4,993)		(2,669)
Proceeds from exercise of stock options		1,008		1,128		1,133
Other		(326)		(259)		(293)
Cash used in financing activities		(2,985)		(3,233)		(2,663)
Impact of exchange rates on cash and cash equivalents		(20)		(12)		(87)
Increase/(decrease) in cash and cash equivalents		202		463		(695)
Cash and cash equivalents, beginning of year		3,185		2,722		3,417
Cash and cash equivalents, end of year		$3,387		$3,185		$2,722
Supplemental disclosure of cash flow information:
Interest paid		$718		$377		$393
Income taxes paid		$2,630		$2,341		$2,170

DISNEY’S 2012 INCOME TAXES FOOTNOTE EXCERPTS

Income Taxes

	2012	2011	2010
Income Before Income Taxes
Domestic (including U.S. exports)	$8,105	$7,330	$6,074
Foreign subsidiaries	1,155	713	553
	$9,260	$8,043	$6,627
Income Tax Expense/(Benefit)
Current
Federal	$1,975	$1,851	$1,530
State	111	272	236
Foreign	422	521	432
	2,624	2,644	2,198
Deferred
Federal	465	147	307
State	(2)	(6)	(191)
	463	141	116
	$3,087	$2,785	$2,314

	September 29, 2012	October 1, 2011
Components of Deferred Tax Assets and Liabilities Deferred tax assets
Accrued liabilities	$(3,034)	$(2,806)
Foreign subsidiaries	(579)	(566)
Equity-based compensation	(160)	(323)
Noncontrolling interest net operating losses	(584)	(554)
Other	(361)	(386)
Total deferred tax assets	(4,718)	(4,635)
Deferred tax liabilities
Depreciable, amortizable, and other property	4,924	4,959
Licensing revenues	336	301
Leveraged leases	33	38
Other	100	136
Total deferred tax liabilities	5393	5,434
Net deferred tax liability before valuation allowance	675	799
Valuation allowance	811	580
Net deferred tax liability	$1,486	$ 1,379

The valuation allowance principally relates to tax attributes of $193 million acquired with UTV and ; $584 million deferred tax asset for the noncontrolling interest share of net operating losses at the International Theme Parks. The ultimate recognition of the noncontrolling interest share of the net operating losses, which have an indefinite carryforward period, would not have an impact on net income attributable to Disney as any income tax benefit would be offset by a charge to noncontrolling interests in the income statement.

A reconciliation of the effective income tax rate to the federal rate is as follows:

	2012	2011	2010
Federal income tax rate	35.0%	35.0%	35.0%
State taxes, net of federal benefit	2.0	2.1	2.6
Domestic production activity deduction	(2.5)	(2.3)	(1.7)
Other, including tax reserves and related interest	(1.2)	(0.2)	(1.0)
	333%	34.6%	34.9%