- How did the Tax Cuts and Jobs Act of 2017 affect the company being analyzed and its financial statements?
NOTE 8-INCOME TAXES On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"). The TCJA includes broad and complex changes to the U.S. tax code that impacted the Company's accounting and reporting for income taxes. The impacts under the TCJA in the prior fiscal year primarily consisted of the following: A reduction in the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018, which resulted in a fiscal 2018 U.S. blended statutory income tax rate for the Company of 28.1%. A one-time mandatory deemed repatriation tax on unremitted foreign earnings (the "Transition Tax"), which the Company elected to pay over an eight- year period. A remeasurement of U.S. net deferred tax assets. The recognition of foreign withholding taxes in connection with the reversal of the Company's indefinite reinvestment assertion related to certain foreign earnings. Staff Accounting Bulletin No. 118 ("SAB 118") established a one-year measurement period (effective December 22, 2017) whereby provisional amounts recorded for the effects of the changes from the TCJA could be subject to adjustment. The one-year measurement period expired on December 22, 2018 and, therefore, the accounting to record the effects of the changes from the TCJA was completed as of December 31, 2018. The provision for income taxes is comprised of the following: Year Ended June 30 2018 2019 2017 (In millions) Current: Federal Foreign State and local 180 S 218 383 san 334 357 (3) 688 Deferred: Federal Foreign State and local (95) 27 (58) (61) 135 35 5 175 863 (118) (66) 513 $ 361 Earnings before income taxes include amounts contributed by the Company's foreign operations of approximately $2,021 million, $2,004 million and $1,676 million for fiscal 2019, 2018 and 2017, respectively. A portion of these earnings is taxed in the United States. THE ESTE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Significant components of the Company's deferred income tax assets and liabilities were as follows: June 30 2019 2018 179 (In millions) Deferred tax assets: Compensation related expenses Inventory obsolescence and other inventory related reserves Retirement benefit obligations Various accruals not currently deductible Net operating loss, credit and other carryforwards Unrecognized state tax benefits and accrued interest Other differences between tax and financial statement values 206 (45 Valuation allowance for deferred tax assets Total deferred tax assets (48) 650 508 Deferred tax liabilities: Depreciation and amortization Other differences between tax and financial statement values Total deferred tax liabilities Total net deferred tax assets (286) (69) (338) (50) (388) 095 120 As of June 30, 2019 and 2018, the Company had net deferred tax assets of $295 million and $120 million, respectively, substantially all of which are included in Other assets in the accompanying consolidated balance sheets. As of June 30, 2019 and 2018, certain subsidiaries had net operating loss and other carryforwards for tax purposes of approximately $162 million and $173 million, respectively. With the exception of approximately $132 million of net operating loss and other carryforwards with an indefinite carryforward period as of June 30, 2019, these carryforwards expire at various dates through fiscal 2031. Deferred tax assets, net of valuation allowances, in the amount of $3 million and $13 million as of June 30, 2019 and 2018, respectively, have been recorded to reflect the tax benefits of the carryforwards not utilized to date. A full valuation allowance has been provided for those deferred tax assets for which, in the opinion of management, it is more likely-than-not that the deferred tax assets will not be realized. As of June 30, 2019 and 2018, the Company had gross unrecognized tax benefits of $67 million and $60 million, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $51 million. The Company classifies applicable interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes. The total gross accrued interest and penalty expense recorded during fiscal 2019 in the accompanying consolidated statement of earnings was $4 million. During 2018, the Company recognized a gross interest and penalty benefit of $3 million in the accompanying consolidated statement of earnings. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at June 30, 2019 and 2018 were $12 million and $9 million, respectively. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows: June 30 | (In millions) 2019 2018 Beginning of the year balance of gross unrecognized tax benefits Gross amounts of increases as a result of tax positions taken during a prior period Gross amounts of decreases as a result of tax positions taken during a prior period Gross amounts of increases as a result of tax positions taken during the current period Amounts of decreases in unrecognized tax benefits relating to settlements with taxing authorities Reductions to unrecognized tax benefits as a result of a lapse of the applicable statutes of limitations End of year balance of gross unrecognized tax benefits Pleso 358 Isleeve F-29 NOTE 8-INCOME TAXES On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"). The TCJA includes broad and complex changes to the U.S. tax code that impacted the Company's accounting and reporting for income taxes. The impacts under the TCJA in the prior fiscal year primarily consisted of the following: A reduction in the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018, which resulted in a fiscal 2018 U.S. blended statutory income tax rate for the Company of 28.1%. A one-time mandatory deemed repatriation tax on unremitted foreign earnings (the "Transition Tax"), which the Company elected to pay over an eight- year period. A remeasurement of U.S. net deferred tax assets. The recognition of foreign withholding taxes in connection with the reversal of the Company's indefinite reinvestment assertion related to certain foreign earnings. Staff Accounting Bulletin No. 118 ("SAB 118") established a one-year measurement period (effective December 22, 2017) whereby provisional amounts recorded for the effects of the changes from the TCJA could be subject to adjustment. The one-year measurement period expired on December 22, 2018 and, therefore, the accounting to record the effects of the changes from the TCJA was completed as of December 31, 2018. The provision for income taxes is comprised of the following: Year Ended June 30 2018 2019 2017 (In millions) Current: Federal Foreign State and local 180 S 218 383 san 334 357 (3) 688 Deferred: Federal Foreign State and local (95) 27 (58) (61) 135 35 5 175 863 (118) (66) 513 $ 361 Earnings before income taxes include amounts contributed by the Company's foreign operations of approximately $2,021 million, $2,004 million and $1,676 million for fiscal 2019, 2018 and 2017, respectively. A portion of these earnings is taxed in the United States. THE ESTE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Significant components of the Company's deferred income tax assets and liabilities were as follows: June 30 2019 2018 179 (In millions) Deferred tax assets: Compensation related expenses Inventory obsolescence and other inventory related reserves Retirement benefit obligations Various accruals not currently deductible Net operating loss, credit and other carryforwards Unrecognized state tax benefits and accrued interest Other differences between tax and financial statement values 206 (45 Valuation allowance for deferred tax assets Total deferred tax assets (48) 650 508 Deferred tax liabilities: Depreciation and amortization Other differences between tax and financial statement values Total deferred tax liabilities Total net deferred tax assets (286) (69) (338) (50) (388) 095 120 As of June 30, 2019 and 2018, the Company had net deferred tax assets of $295 million and $120 million, respectively, substantially all of which are included in Other assets in the accompanying consolidated balance sheets. As of June 30, 2019 and 2018, certain subsidiaries had net operating loss and other carryforwards for tax purposes of approximately $162 million and $173 million, respectively. With the exception of approximately $132 million of net operating loss and other carryforwards with an indefinite carryforward period as of June 30, 2019, these carryforwards expire at various dates through fiscal 2031. Deferred tax assets, net of valuation allowances, in the amount of $3 million and $13 million as of June 30, 2019 and 2018, respectively, have been recorded to reflect the tax benefits of the carryforwards not utilized to date. A full valuation allowance has been provided for those deferred tax assets for which, in the opinion of management, it is more likely-than-not that the deferred tax assets will not be realized. As of June 30, 2019 and 2018, the Company had gross unrecognized tax benefits of $67 million and $60 million, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $51 million. The Company classifies applicable interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes. The total gross accrued interest and penalty expense recorded during fiscal 2019 in the accompanying consolidated statement of earnings was $4 million. During 2018, the Company recognized a gross interest and penalty benefit of $3 million in the accompanying consolidated statement of earnings. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at June 30, 2019 and 2018 were $12 million and $9 million, respectively. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows: June 30 | (In millions) 2019 2018 Beginning of the year balance of gross unrecognized tax benefits Gross amounts of increases as a result of tax positions taken during a prior period Gross amounts of decreases as a result of tax positions taken during a prior period Gross amounts of increases as a result of tax positions taken during the current period Amounts of decreases in unrecognized tax benefits relating to settlements with taxing authorities Reductions to unrecognized tax benefits as a result of a lapse of the applicable statutes of limitations End of year balance of gross unrecognized tax benefits Pleso 358 Isleeve F-29
