FASB Interpretation No. 48 An Interpretation of FASB Statement No. 109 Royce W. Mitchell

Purpose and Objectives Reasons for issuance The scope of the interpretation The Two-Step process Recognition and the “more-likely-than-not” benchmark Measurement of benefit to be recognized Disclosure requirements Effective date and transition

Reasons for Issuance Statement 109 contains no specific guidance on uncertainty Significant diversity in practice “Lowest common denominator” accounting

Scope All tax positions accounted for under Statement 109 Applies to past returns filed and future returns to be filed Federal and state income tax positions Interim and annual periods

Two-Step Process Recognition “More-likely-than-not” standard Likelihood of more than 50 percent that the tax position will be upheld upon examination Requires positive assertion by Company Considers facts, circumstances and information available at reporting date Presumes examination and consideration of precedents Each position examined on its on – no offsets Determination of “unit-of-measure”

Two-Step Process Measurement Largest amount of tax benefit that meets the more-likely-than-not standard Considers amounts and probabilities of outcomes that could be realized Measurement done within unit of measure for each tax position

Measurement Example Possible Benefit Outcome Percentage Probability of Successful Outcome Cumulative Percentage Probability of Success $100 (Complete success in settlement or litigation with IRS) 10% $80 (very favorable compromise) 20% 30% $60 (fair compromise) 25% 55% $40 (unfavorable compromise) 85% $0 (total loss) 15% 100%

Other Consideration Tax planning strategies Subsequent changes in circumstance MLTN threshold met Tax matter settled Statute of limitations passed

Changes in Judgment Result of evaluation of new information Not from new evaluation or new interpretation by management Discreet item in period change occurs

Interest and Penalties Start accruing interest in first period required by relevant tax law Penalties accrued if position does not meet minimum statutory requirement

Classification Liability associated with aggressive tax position not deferred tax liability Classified as current or long-term like any other liability Accounting policy elections- Interest classified as interest or income tax Penalties classified as income tax or another expense classification

Disclosures Tabular disclosure Unrecognized tax benefits that would affect the effective tax rate Interest and penalties recognized in income statement Reasonably possible changes in unrecognized benefits in next 12 months Nature of uncertainty and event in next 12 months Range of reasonably possible change Tax years subject to examination by tax year Policy on classification of interest and penalties

Tabular Disclosure Tabular reconciliation for each period presented Gross amounts of increases/decreases in unrecognized tax benefits as a result of tax positions taken in prior years Gross amounts of increases/decreases in unrecognized tax benefits as a result of tax positions taken in current year Decreases in unrecognized tax benefits as a result of settlements with taxing authorities Decreases in unrecognized tax benefits due to lapse of statute of limitations

Disclosures Tabular disclosure Unrecognized tax benefits that would affect the effective tax rate Interest and penalties recognized in income statement Reasonably possible changes in unrecognized benefits in next 12 months Nature of uncertainty and event in next 12 months Range of reasonably possible change Tax years subject to examination by tax year Policy on classification of interest and penalties

Illustrative Disclosure – pp A33 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 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 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 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 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. The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, 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 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: (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 30,000 Reductions 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 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 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. 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 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, and 2006, respectively.

Effective Date and Transition Fiscal years beginning after December 15, 2006 Earlier adoption encouraged Cumulative effect applied to opening retained earnings Disclosure in balance sheet only in year of adoption

Consideration and Near Term Actions Steps Senior management and the board should consider Does the Company have adequate internal controls to support the process of identifying and continually evaluating all tax positions? Does the Company have sufficiently competent personnel to perform control procedures and oversee processes? Is use of outside professionals adequate to achieve adequate control procedures and overcome lack of internal trained personnel? What outside professionals to consult? Tax professional with audit firm or not?

Consideration and Near Term Actions Steps Need to begin process of identifying all tax positions Disclosure considerations for 12/31/06 financial statements Work needs to be completed, at a minimum, prior to reporting on 1st quarter of 2007 for public companies Private companies have more time

Consequences Less flexibility for management in determining reserves for tax exposures Increased disclosure to public of tax exposures Could trigger detailed questions from analysts Attention from IRS? Greater income statement volatility as managements assessments of issues changes Will it make companies more risk averse?

SEC Guidance No preferability letter for change in classification of interest and penalties Tabular presentation not required until year-end

Review Reasons for issuance The scope of the interpretation The Two-Step process Recognition and the “more-likely-than-not” benchmark Measurement of benefit to be recognized Disclosure requirements Effective date and transition

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