Accounting for Income Taxes at Apple, Inc.

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Read the following Case Study:

Hopkins, J. J. (2017). Accounting for income taxes at Apple Inc. Harvard Business Publishing.

Review Apple’s financial statements included in the Case Study, including Note 5 (Exhibit 1), and answer the following questions related to permanently reinvested earnings:

  • How much cash, cash equivalents, and marketable securities do Apple shareholders really own, net of the IRS claims on this cash? In other words, if Apple liquidated these investments at the value on the balance sheet, repatriated the cash, and paid a one-time dividend, how much would shareholders receive? (Hint: Assume that all the income that Apple has earned in foreign subsidiaries has been converted into cash or investments. Also, when Apple says, “U.S. income taxes have not been provided,” it is not referring to the payment of taxes, but to the recognition of taxes from a financial reporting perspective.)
  • What effect would this transaction from Question 1 have on Apple’s reported earnings? Would it differ between the US GAAP and IFRS?
  • Alternatively, instead of distributing a dividend, Apple chose to reinvest the foreign earnings by purchasing a company domiciled outside of the United States. How much cash (net of taxes) would Apple have at its disposal for such a purpose?
  • What effect would the transaction in Question 3 have on reported earnings? Would it differ between the US GAAP and IFRS?
  • Finally, assume that Congress designated a repatriation tax holiday and allowed U.S. corporations to repatriate foreign cash without paying any U.S. income taxes on them. How would this affect Apple’s net income if it repatriated all its foreign-based cash?

Questions related to Apple’s balance sheet:

  • How much in deferred tax assets/liabilities are on Apple’s balance sheet as of 2015 and where do they appear? What is the single-largest component of these deferred taxes and from what does it result?
  • What valuation allowance did Apple record in 2015? What does this imply about Apple’s future? Would the valuation allowance differ between the US GAAP and IFRS? Explain in detail why or why not.

Questions related to Apple’s income statement:

  • If Apple paid income taxes in the US at the statutory corporate income tax rate, how much would Apple owe in U.S. income taxes in 2015? How much did Apple pay to the U.S. government in income taxes during 2015? Why are these amounts different? Hint: refer back to the module where we discussed international taxation during this course.
  • Does Apple have any uncertain tax positions? What do they imply, and what effect do these uncertain tax positions have on current income tax expense? Does the accounting for uncertain income tax positions differ between the US GAAP and IFRS? Be specific.
  • What amount of current income tax expense did Apple record in 2015? How much cash did Apple pay in taxes in 2015? Why are these amounts different?

Other questions related to Apple:

  • Expand in some level of detail what types of accounting-related cultural issues Apple might face when operating in different countries around the world, especially with regards to the combination of local country statutory financial statement and related reporting requirements compared to the US GAAP reporting requirements.
  • Apple is obviously dealing with huge amounts of investments and cash, a large amount of which is located overseas and most likely invested in foreign currencies. Based upon what you have learned in this course, what are some of the foreign-currency management techniques Apple is most likely practicing in the management of these investments and cash sitting in bank and investment accounts across the globe? Be specific.
  • Your Word document should be 8 pages in length (not including the required cover and references pages). Submissions in excess of 10 pages are permitted.
  • Format your submission according to the APA
  • You may submit an Excel file as a separate file supporting your submission. If you include Exhibits as part of your Word document supporting any quantitative calculations, include them as part of your submission.
  • Be sure to discuss and reference concepts taken from the required and recommended readings throughout the course and also your own relevant research.
  • You must include a minimum of six credible, academic, or professional references beyond the course text, required and recommended readings, or other course materials as part of your submission.
  • Review the grading rubric attached

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Explanation & Answer

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Running head: INCOME TAXES AT APPLE INC.

Income Taxes at Apple Inc.
Name
Institution

1

INCOME TAXES AT APPLE INC.

2

Income Taxes at Apple Inc.
Permanently reinvested earnings

In 2015, 2016 and 2016 the income taxes of the foreign pre-tax earnings were $47.6 billion, 41.1
billion and 44.7 billion respectively. The taxes that were provided on foreign pre-tax earnings for 2017, 2016
and 2015 are as follows $7.9 billion, $6.7 billion and 7.3 billion respectively. As of September 30th 2017
there was no provision of US income taxes that accumulated to $128.7 billion of such earnings. On the
other hand, the unrecognized deferred tax reliability was estimated to be $42.2 billion. As such, the Apple
shareholders really own cash, cash equivalents and market securities as follows: as of September 24, 2016
and September 30, 2017, the amount was 216.0 billion and 252.3 billion respectively. Notably, these were
held by foreign subsidiaries which are based in USA dollar dominated holdings. The amounts that the
foreign subsidiaries held are subjected to US income taxation that is repatriated to the US.
The strength of the Apple is its strong cash position. The company holds cash and cash
equivalents of 216 billion and it also has 252.3 billion marketable securities. This means that the
marketable securities can easily be converted into cash. Therefore, this indicates that it has an ample cash
chest. Since most of the money is held overseas the company must pay taxes to the US so as to bring it to
the country. As a result, this makes the company to borrow money thus engaging in the program of share
buyback. The company would also incur risks in extending credit in business. Apple is insured to limit the
risk to this exposure. The marketable securities are subjected to risks in the interest rates especially when it
starts moving up. This is a representation of what the company owns in terms of equipment and property
that account for wear and tear associated with use. This would differ with the US GAAP and IFRS.
If the company decides not to distribute the dividend then, it would reinvest in foreign earnings.
This means that they would pay $38 billion in terms of repatriation taxes on the investments and taxes.
Therefore, this means that out of the 252.3 billion marketable securities, it would have an estimate of $207

INCOME TAXES AT APPLE INC.

3

billion on its disposal. The steps for calculating the estimated net cash involve the following steps. Use of
the $38 billion tax payment. Then, this should be divided by the 15.5% tax rate. The total cash of $245
billion that would be brought back should then be calculated. Then, the $38 billion in taxes should be
subtracted. This leaves us with $202 billion in net cash.
This kind of transaction would have some effects on the earnings mentioned. One effect is the
cash for paying for the dividend would be used in another way. This would then mean that there would be
debts that would be incurred. One should as well remember that the company generates a lot of money
yearly. The companies that Apple intends to buy are Disne...


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