Avon Deferred Taxes Analysis

Assignment 5

Note 7: Taxes

Note 7 shows a breakdown of deferred taxes assets and liabilities for Avon. Deferred taxes are the differences between tax books and accounting books. Starting from the top of the deferred tax assets, we notice a drop in accrued expenses and reserves of $18 million. We recognize that the average tax rate is approximately 30 percent so will triple the amount to get our estimated income. Therefore, the $18 million drop was a result tax book expense was greater than the expense of the accounting books. We can also state that this has a greater taxable income on the accounting book than it does on the tax books.

We see a rise in deferred tax assets of pension and postretirement benefits account of $11 million. Avon also breaks out a second line called postemployment benefits which will combine when we look at. We note that later in the chapter that Avon has a large defined benefit plan liability. It is broken out into accumulated benefit obligation and the projected benefit obligation which will take future wages into consideration. In other words, they are stating that their postretirement benefits and pension plans are significantly underfunded. Avon recognizes the amount they have underfunded in the balance sheet under other comprehensive income. This location will bypass the income statement which will essentially not affect Avon’s profit numbers. One thing that I noticed when looking at the deferred taxes over the years was the movement in these accounts was odd. In 2009 they stopped carrying a balance in “employee benefit plans” and distributed the amount over “postretirement benefits” and “share-based compensation.” The net difference was a drop in $261 million and a gain in $113 and $60 million leaving a net of $98 million. This amount happens to be the net change of accrued expenses and reserves. I believe that they were able to convince the auditors to put it into an account where it would not draw attention to their inability...