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Income Taxes | 12 Months Ended
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Jun. 30, 2011
Income Taxes |
Income Taxes |
Note 13. | Income Taxes
For financial reporting purposes, earnings before income taxes include the following components:
|  | 2011 |  | 2010 |  | 2009 |
|  | (In millions) |
United States |  | $ | 2,035 |  | $ | 1,453 |  | $ | 1,332 |
Foreign |  | 980 |  | 1,132 |  | 1,168 |
|  | $ | 3,015 |  | $ | 2,585 |  | $ | 2,500 |
Significant components of income taxes are as follows: |  |  |  |  |  |  |
|  | 2011 |  | 2010 |  | 2009 |
|  | (In millions) |
Current |  |  |  |  |  |  |
Federal |  | $ | 251 |  | $ | 422 |  | $ | 626 |
State |  | 10 |  | 18 |  | 28 |
Foreign |  | 222 |  | 195 |  | 139 |
Deferred |  |  |  |  |  |  |
Federal |  | 483 |  | 107 |  | (4 | )
State |  | 43 |  | (4 | ) | 10 |
Foreign |  | (12 | ) | (72 | ) | 13 |
|  | $ | 997 |  | $ | 666 |  | $ | 812 |
Significant components of deferred tax liabilities and assets are as follows.
|  | 2011 |  | 2010 |
|  | (In millions) |
Deferred tax liabilities |  |  |  |  |
Property, plant, and equipment |  | $ | 1,016 |  | $ | 677 |
Equity in earnings of affiliates |  | 255 |  | 187 |
Inventories |  | 324 |  | 33 |
Other |  | 104 |  | 143 |
|  | $ | 1,699 |  | $ | 1,040 |
Deferred tax assets |  |  |  |  |
Pension and postretirement benefits |  | $ | 307 |  | $ | 358 |
Stock compensation |  | 58 |  | 59 |
Foreign tax credit carryforwards |  | 46 |  | 41 |
Foreign tax loss carryforwards |  | 220 |  | 135 |
State tax attributes |  | 57 |  | 50 |
Other |  | 129 |  | 120 |
Gross deferred tax assets |  | 817 |  | 763 |
Valuation allowances |  | (95 | ) | (71 | )
Net deferred tax assets |  | $ | 722 |  | $ | 692 |
Net deferred tax liabilities |  | $ | 977 |  | $ | 348 |
Current deferred tax assets (liabilities) included in other assets (accrued expenses) |  | (118 | ) | 91 |
Non-current deferred tax liabilities |  | $ | 859 |  | $ | 439 |
Reconciliation of the statutory federal income tax rate to the Company’s effective tax rate on earnings is as follows:
|  | 2011 |  | 2010 |  | 2009 |
Statutory rate |  | 35.0 | % | 35.0 | % | 35.0 | %
State income taxes, net of federal tax benefit |  | 1.1 |  | 0.3 |  | 1.0 |
Foreign earnings taxed at rates other than the U.S. statutory rate |  | (4.9 | ) | (8.2 | ) | (8.7 | )
Foreign currency remeasurement |  | 0.9 |  | (0.7 | ) | (0.5 | )
WIHL Liquidation |  | — |  | 0.5 |  | 6.6 |
Other |  | 1.0 |  | (1.1 | ) | (0.9 | )
Effective rate |  | 33.1 | % | 25.8 | % | 32.5 | %
The Company has $220 million and $135 million of tax assets related to net operating loss carry-forwards of certain international subsidiaries at June 30, 2011 and 2010, respectively. As of June 30, 2011, approximately $211 million of these assets have no expiration date, and the remaining $9 million expire at various times through fiscal 2024. The annual usage of certain of these assets is limited to a percentage of taxable income of the respective international subsidiary for the year. The Company has recorded a valuation allowance of $52 million and $38 million against these tax assets at June 30, 2011 and 2010, respectively, due to the uncertainty of their realization. The Company has $46 million and $41 million of tax assets related to excess foreign tax credits at June 30, 2011 and 2010, respectively, which begin to expire in fiscal 2013. The Company has $57 million and $50 million of tax assets related to state income tax attributes (incentive credits and net operating loss carryforwards), net of federal tax benefit, at June 30, 2011 and 2010, respectively, which will expire at various times through fiscal 2017. The Company has recorded a valuation allowance of $7 million against the excess foreign tax credits at June 30, 2011, due to the uncertainty of realization. The Company has recorded a valuation allowance against the state income tax assets of $36 million, net of federal tax benefit, as of June 30, 2011. As of June 30, 2010, the Company had a $7 million valuation allowance recorded related to the excess foreign tax credits and a $26 million valuation allowance related to state income tax attributes, due to the uncertainty of realization. The Company remains subject to federal examination in the U.S. for the calendar tax year 2010. Undistributed earnings of the Company’s foreign subsidiaries and the Company’s share of the undistributed earnings of affiliated corporate joint venture companies accounted for on the equity method amounting to approximately $8.2 billion at June 30, 2011, are considered to be permanently reinvested, and accordingly, no provision for U.S. income taxes has been provided thereon. It is not practicable to determine the deferred tax liability for temporary differences related to these undistributed earnings. During 2009, approximately $158 million of income tax expense was incurred related to the Company’s investment in Wilmar International Holdings, Limited (WIHL), a subsidiary of ADM Asia Pacific, Limited (ADMAP), a wholly-owned subsidiary of the Company. On April 1, 2009, WIHL distributed publicly traded shares of Wilmar to ADMAP which triggered the $158 million of income tax expense. Additionally, the Company recognized $12 million of income tax expense during fiscal year 2010 related to the 2009 distribution. Through WIHL, ADMAP holds a direct ownership interest in Wilmar. The Company accounts for its income tax positions under the provisions of ASC Topic 740, Income Taxes. ASC Topic 740 prescribes a minimum threshold a tax position is required to meet before being recognized in the consolidated financial statements. This interpretation requires the Company to recognize in the consolidated financial statements tax positions determined more likely than not to be sustained upon examination, based on the technical merits of the position. The total amounts of unrecognized tax benefits at June 30, 2011 and 2010 are as follows:
|  | Unrecognized Tax Benefits |
|  | 2011 |  | 2010 |
|  | (in millions) |
Beginning balance |  | $ | 84 |  | $ | 54 |
Additions related to current year’s tax positions |  | 4 |  | 31 |
Additions related to prior years’ tax positions |  | — |  | 8 |
Reductions related to prior years’ tax positions |  | (7 | ) | (7 | )
Settlements with tax authorities |  | (2 | ) | (2 | )
Ending balance |  | $ | 79 |  | $ | 84 |
The additions and reductions in unrecognized tax benefits shown in the table include effects related to net income and shareholders’ equity. The 2011 changes in unrecognized tax benefits did not have a material effect on the Company’s net income or cash flow. The Company classifies interest on income tax related balances as interest expense or interest income and classifies tax-related penalties as selling, general and administrative expenses. At June 30, 2011 and 2010, the Company had accrued interest and penalties on unrecognized tax benefits of $27 million in both years. The Company is subject to income taxation in many jurisdictions around the world. Resolution of the related tax positions, through negotiations with relevant tax authorities or through litigation, may take years to complete. Therefore, it is difficult to predict the timing for resolution of tax positions. However, the Company does not anticipate that the total amount of unrecognized tax benefits will increase or decrease significantly in the next twelve months. Given the long periods of time involved in resolving tax positions, the Company does not expect that the recognition of unrecognized tax benefits will have a material impact on the Company’s effective income tax rate in any given period. If the total amount of unrecognized tax benefits were recognized by the Company at one time, there would be a positive impact of $45 million on the tax expense for that period. The Company’s wholly-owned subsidiary, ADM do Brasil Ltda. (“ADM do Brasil”), received three separate tax assessments from the Brazilian Federal Revenue Service (“BFRS”) challenging the tax deductibility of commodity hedging losses and related expenses incurred by ADM do Brasil. The tax assessments are for income tax, penalties and interest for the tax years 2004, 2006 and 2007 in the amounts of $549 million, $22 million, and $94 million, respectively (adjusted for interest and variation in currency exchange rates). ADM do Brasil’s tax return for 2005 was also audited and no assessment was received. The statute of limitations for 2005 has expired. If the BFRS were to challenge commodity hedging deductions in tax years after 2007, the Company estimates it could receive additional claims of approximately $114 million (as of June 30, 2011 and subject to variation in currency exchange rates). ADM do Brasil enters into commodity hedging transactions that can result in gains, which are included in ADM do Brasil’s calculations of taxable income in Brazil, and losses, which ADM do Brasil deducts from its taxable income in Brazil. The Company has evaluated its tax position regarding these hedging transactions and concluded, based upon advice from Brazilian legal counsel, that it was appropriate to recognize both gains and losses resulting from hedging transactions when determining its Brazilian income tax expense. Therefore, the Company has continued to recognize the tax benefit from hedging losses in its financial statements and has not recorded any tax liability for the amounts assessed by the BFRS. ADM do Brasil filed an administrative appeal for each of the assessments. During the second quarter of fiscal 2011, a decision in favor of the BFRS on the 2004 assessment was received and a second level administrative appeal has been filed. There have been no decisions on the initial appeal related to the 2006 and 2007 assessments. If ADM do Brasil continues to be unsuccessful in the administrative appellate process, further appeals are available in the Brazilian federal courts. While the Company believes that its consolidated financial statements properly reflect the tax deductibility of these hedging losses, the ultimate resolution of this matter could result in the future recognition of additional payments of, and expense for, income tax and the associated interest and penalties. The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2007.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 136, 172 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 43, 44, 45, 46, 47, 48, 49 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 + Details
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