The
complete financial statements of Stora Enso Oyj for the company’s year ended
December 31, 2009, are available at the company’s website (www.storaenso.com).
Refer to Stora Enso’s financial statements and accompanying notes and answer
the following questions.
Instructions
(a)
Identify all income tax accounts reported on the December 31, 2009 statement of
financial position. Explain clearly what each account represents.
(b)
What are the temporary differences that existed at December 31, 2009, and resulted
in the deferred taxes? Which of these differences might relate to the deferred
tax assets and which ones to the deferred tax liabilities? Explain the reasons
for your answers.
(c)
Reconcile the opening balance to the closing balance for the income taxes
receivable (payable) account and the deferred tax accounts for the year ended
December 31, 2009. What are the major transactions causing the balance to
change from January 1 to December 31?
(d)
Does Stora Enso’s management think it is probable that the benefits related to
future deductible amounts will be realized? Explain. Discuss the valuation
allowance for the deferred taxes and how the company arrived at this valuation
allowance. What are the gross amounts of the loss carryforwards that the
company has available and what are the expiry dates for these losses?
(e)
Has Stora Enso applied intraperiod tax allocation in 2009? Explain.
(f)
How much income tax did Stora Enso pay in 2009? Where did you find this
information?
(g)
What was the effective tax rate for Stora Enso in 2009? In 2008? In 2007? What
were the major causes of the differences between the statutory and effective
tax rates for 2009 and 2008? For each reason you give, explain whether the
effective rate was made higher or lower than the statutory rate.
This was taken from the financial statements of Stora Enso Oyj for the year ended December 31, 2009. (All amounts in millions of euros.)
(a)
Balance
Sheet: millions of EUR
Deferred
taxes (non-current asset) 155.8
Tax receivable (current asset) 2.4
Deferred
taxes (long-term liability) 364.4
Tax liabilities (current liability) 108.1
Under
IFRS, deferred taxes can only be classified as non-current. The deferred tax asset represents the
expected amount of the reduction in the amount of the taxes that will be paid
in the future when the temporary differences giving rise to future deductible
amounts reverse. The deferred tax liability represents the amount of the taxes
that are expected to be paid in the future when the temporary differences giving
rise to future taxable amounts reverse.
The tax liabilities account represents the amount still owing to the
government as of December 31, 2009, and the tax receivable account represents
overpayment of taxes and still receivable as a refund from the government as of
December 31, 2009.
(b)
(From note 10)
Deferred tax assets
(in millions of EUR)
|
Fixed
asset depreciation differences
|
416.9
|
|
Untaxed
provisions
|
-1.6
|
|
Pension
provisions
|
-25.4
|
|
Other
provisions
|
-90.0
|
|
Unrealized
internal profits
|
-3.8
|
|
Tax
losses carried forward
|
-431.2
|
|
Other
|
-41.4
|
|
Less:
valuation allowance
|
383.8
|
|
|
207.3
|
|
Deferred
taxes in equity (related to OCI)
|
|
|
Available
for sale investments (FV-OCI)
|
2.5
|
|
Derivative
financial instruments
|
-1.2
|
|
Total
deferred taxes
|
208.6
|
|
Shown
on statement of financial position as:
|
|
|
Liabilities
|
364.4
|
|
Assets
|
-155.8
|
The fixed asset depreciation
is included in the deferred tax liabilities account since it is a large
positive balance and we know that generally tax write offs of assets are faster
than accounting depreciation rates. The
pension provisions and unrealized holding gain/loss provisions along with the
tax loss carryforwards, net of the valuation allowance are included in deferred
tax assets. All of these represent
future deductions that might be available to the company to reduce future taxes
payable. This results in a possible
benefit. It is not possible to reconcile
the split perfectly between assets and liabilities, as a result a portion of
the “other provisions” and “other” impact both the asset and liability
accounts. It is also not possible to
determine if any of these amounts will reverse in the next 12 months.
(c)
In
millions of EUR (From Note 10)
|
|
Current Tax
|
Deferred Tax
|
|
Balance Jan 1
|
79.8
|
203.0
|
|
Translation differences
|
1.1
|
13.7
|
|
Companies acquired
|
-2.8
|
-13.2
|
|
Companies divested
|
0.1
|
|
|
OCI
|
|
65.5
|
|
Pension actuarial movement
|
|
-5.4
|
|
Equity hedging
|
4.1
|
|
|
Income statement – continuing operations
|
46.4
|
-55.0
|
|
Income statement – discontinued operations
|
|
|
|
Equity accounts – investments
|
-20.0
|
|
|
Taxes received (paid)
|
-3.0
|
|
|
Balance – December 31, 2009
|
105.7
|
208.6
|
The largest adjustments are
the OCI adjustment for deferred taxes, the amount of the current tax provision
for the current net income and the adjustment for investments.
(d)
As discussed in Note 10, the company has recognized tax
benefits related to loss carryforwards in the amount of EUR 431.2 million. In addition, the company has recognized a
valuation allowance of EUR 298.7 million related to these benefits, and EUR
85.1 relating to deferred tax assets arising from temporary differences. As described in Note 11, the valuation
allowance increased by EUR 180 million as a result of the current trading
position of the company (ie. its net losses) and the general economic conditions.
The company
states that this valuation allowance has been determined using probabilities of
future profits arising in the relevant jurisdictions. Stora Enso has the following gross losses
available for carry forward:
|
millions of EUR
|
Expiry date
|
|
629
|
No expiry date
|
|
28
|
2010 – 2014
|
|
963
|
2015 and later
|
|
Total 1620
|
|
(e)
Stora Enso has allocated tax within the period to
continuing operations, OCI items, pension actuarial adjustments ( directly in
equity) and equity hedging (also directly in equity). In 2008, the company had also allocated a
portion of taxes to the discontinued operations.
(f)
The actual amount of income taxes paid was EUR3
million. This was disclosed in two
places: on the cash flow statement as an
operating cash flow and in note 10 in the reconciliation of current taxes.
(g)
As found in Note 10, the statutory tax rate for Stora Enso was 28.3% in 2009, 26.2%
in 2008 and 23.3% in 2007. The effective
tax rates were: 1% in 2009, 24% in 2008
and 36.6% in 2007. The major causes of the differences between the statutory and effective tax
rates and the amounts
are presented below.
|
|
2009
%
|
2008
%
|
|
Income tax expense at statutory rates
|
28.3
|
26.2
|
|
Non
deductible expenses and tax exempt income
|
-10.4
|
3.0
|
|
Valuation
allowances on deferred tax assets
|
-19.1
|
-9.4
|
|
Provision
for and settlement of tax cases
|
2.4
|
6.9
|
|
Tax
rate changes
|
-0.1
|
4.7
|
|
Impairment
of goodwill
|
-0.1
|
-7.4
|
|
|
1.0
|
24.0
|
