This panel will discuss the income tax accounting implications of legislative and regulatory developments, their impact on your company’s effective tax rate and actions companies are taking.

1. 22nd Annual Health Sciences
Tax Conference
Accounting for income taxes: hot topics and
developments
December 3, 2012

2. Disclaimer
► Any US tax advice contained herein was not intended or written to be
used, and cannot be used, for the purpose of avoiding penalties that may
be imposed under the Internal Revenue Code or applicable state or local
tax law provisions.
► These slides are for educational purposes only and are not intended, and
should not be relied upon, as accounting advice.
Page 2 Accounting for income taxes: hot topics and developments

3. Disclaimer
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Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving
member firm of Ernst & Young Global Limited operating in the US. For more information
about our organization, please visit www.ey.com.
This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of this
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presentation or its contents by any third party.
Views expressed in this presentation are not necessarily those of Ernst & Young LLP.
Page 3 Accounting for income taxes: hot topics and developments

4. Presenters
► Tricia Brosnan ► Joan Schumaker
Vice President of Global Tax Ernst & Young LLP
Operations New York, NY
Pfizer Inc. +1 212 773 8569
joan.schumaker@ey.com
► Jay Fischbein
Tax Director for Janssen ► Mitchell Stauffer
Pharmaceuticals Ernst & Young LLP
Johnson & Johnson Chicago, IL 60606
+1 312 879 5720
mitch.stauffer@ey.com
Page 4 Accounting for income taxes: hot topics and developments

5. Topics
► Recent developments:
► US, state and local
► Extenders
► Tax reform
► Current issues in restatements
► U.S. Securities and Exchange Commission (SEC) areas
of focus
► Public Company Accounting Oversight Board (PCAOB) inspections
► Financial accounting update:
► International Financial Reporting Standards (IFRS)
► Financial Accounting Standards Board (FASB) and International
Accounting Standards Board (IASB) joint projects
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6. Recent developments

7. Recent developments
► State and local:
► California — November 6, 2012 ballot initiative (Proposition 39) making single
sales factor mandatory as of January 1, 2013
► Washington, DC — September 14, 2012 — combined reporting regulations became final
— October 2, 2012 — mayor approved legislation amending reporting
provisions for 90 days; final legislation can take months or a year
— If enactment of combined reporting results in an increase in combined
group’s net deferred tax liability, a “FAS 109”
deduction is provided
► Massachusetts — Effective July 1, 2012, law postponed for one additional year
“FAS 109” deduction which was scheduled to begin in 2013
— The deduction, enacted in 2008 in combined reporting legislation,
was originally to be claimed over seven years beginning in 2012
► New Jersey — Voluntary disclosure initiative for companies with nexus from the use
of intangible assets in NJ
— Disclosure through January 15, 2013 for periods beginning after
December 31, 2003
► New York State — August 23, 2012: Department of Taxation and Finance issued
proposed amendments to combined reporting regulation
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8. Recent developments
► US:
► Internal Revenue Service Notice 2012-73: announces intent to issue a
delay in the effective date to January 1, 2014 of the tangible property
temporary regulations
► Key business tax provisions that expired on December 31, 2011 include:
► Exceptions under subpart F for active financing income
► “Look-through” treatment of payments between related controlled foreign corporations
► The research tax credit
► 100% bonus depreciation of qualified property
► Increased expensing to US$500,000/US$2 million and an expanded Section 179 property
definition
► The work opportunity tax credit
► The new markets tax credit
► 15-year straight-line cost recovery for certain business improvements
► The wind energy production tax credit
► Incentives for biodiesel and renewable diesel
► The cellulosic biofuel producer tax credit
Page 8 Accounting for income taxes: hot topics and developments

9. Recent developments
► US (cont.):
► Key business tax provisions that expire December 31, 2012 include:
► Extension of 50% additional first-year depreciation for property placed in service after
December 31, 2011
► Election to accelerate alternative minimum tax (AMT) credits in lieu of additional first-year
depreciation
► Increased Section 179 dollar limitations for expensing to US$125,000/US$500,000
► Repeal of collapsible corporation rules
► Tax-exempt bonds for educational facilities
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10. Expired and expiring tax laws
Tax accounting
► Computation of estimated annual effective tax rate
(EAETR) for interim reporting purposes should include the
effects of enacted tax law or rates.
► Tax benefits of expired provisions should not be included in the
computation of the interim or annual tax provision until tax law is
reinstated.
► Be prepared to recognize the effects of reinstatement, if any, by
December 31, 2012.
► Review extender provisions that expire at December 31, 2012 for
exclusion from 2013 forecast estimated annual effective tax rate.
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11. Tax reform proposals
► Reduction in US corporate tax rate
► A lower US corporate tax rate has been proposed in every tax budget or reform plan
submitted.
► If enacted, possibility the rate reduction is phased in
► Consider 2013–2014 income deferral or deduction acceleration decisions:
► Real after-tax cash benefit if a lower tax rate is enacted and deductions are
accelerated into a 35% tax year or income is deferred into a lower rate year
► Increase in taxable temporary differences may result in a discrete financial
statement benefit upon enactment (assuming a lower rate is enacted
► Effective tax rate impact recognized in the period of enactment of legislation that
lowers corporate tax rate.
► Broadening of tax base
► Territorial regime
► Base erosion provisions
► Model effective tax rate under legislative proposals
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12. Current issues in restatements

13. Restatements
Restatement Restatement
statistics — 2011 No. % statistics — 2010 No. %
Big R — audit opinion 39 1.0% Big R — audit opinion 42 1.1%
revised revised
Little r — audit opinion 24 0.6% Little r — audit opinion 23 0.6%
not revised not revised
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14. Restatements
Top 3 topics — 2011 No. % Top 3 topics — 2010 No. %
Income taxes 18 20% Revenue recognition 21 17%
Revenue recognition 9 10% Income taxes 15 12%
Statement of cash flows 5 6% Derivatives 9 7%
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15. Related income tax accounting topics
► Application of tax technical rules: tax basis and carryback
periods
► Realizability of deferred tax assets (DTAs)
► Accounting for outside basis differences
► Intercompany transactions
► Other
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16. Application of tax technical rules: tax basis
and carryback periods
► Incorrect identification or calculation of tax basis and
carryback periods
► Requires technical understanding of tax law:
► Often for multiple taxing jurisdictions
► May be simple or complex
► Detailed record of tax basis
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17. Realizability of DTAs
► Inappropriate evaluation of realizability of DTAs, resulting
in inappropriate valuation allowance conclusion:
► Projections of taxable income does not equal tax planning strategy
► Substitution of a tax benefit does not equal realization
► Evaluating DTAs on a net basis and using naked credits as a
source of taxable income does not equal realization
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18. Accounting for outside basis differences
► Inappropriate application of exceptions to deferred tax
liability recognition for outside basis differences
► Not providing taxes for basis difference related to investments in:
► Partnerships
► Equity method investments
► No longer qualifying for exception with changes in investment
ownership
► Corporate joint ventures
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19. Intercompany transactions
► Paying close attention to intercompany transactions
► Change in tax basis in buying jurisdiction must be eliminated.
► Prepaid tax is deferred until the asset leaves the
consolidated group.
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20. Other quality occurrences
► Changing uncertain tax position (UTP) recognition without
change in facts and circumstances
► Inappropriate current vs noncurrent presentation for
deferred taxes and UTPs
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21. UTP changes in judgment
► Change in judgment as to recognition or measurement
► To be based on new information vs simply changing an
interpretation or evaluation of previous information
► Expected to be supported by triggering events with new information
► Change in judgment that results in subsequent
recognition, de-recognition or changes in measurement of
a tax position that was taken in a prior annual period
(including any interest and penalties)
► Discrete event recognized in earnings in the period (interim or
annual) in which the change occurs
► Change in judgment related to a tax position taken in prior
interim periods of the current year
► Include in EAETR
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22. SEC areas of focus

23. SEC regulatory focus
► Foreign earnings
► Realizability of DTAs
► UTPs
► Indirect taxes — contingencies
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24. Foreign earnings
► Indefinite reinvestment
► Not an all or nothing assertion
► Positive assertion requires specific documentation and evidence of
plans each reporting period
► Consider financial reporting implications of tax planning
► SEC comments
► Disaggregation in rate reconciliation
► Rate differences vs permanent differences
► Liquidity discussion and consistency with accounting
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25. Realizability of DTAs
► SEC comments
► How evidence was weighted:
► Specific positive and negative evidence weighed
► “Robust and non-boilerplate” disclosure that explains weighting and
sources of income considered and objectivity of evidence
► Cumulative losses
► Difficult to support assertion that economic downturn is an aberration
► Timing and reason for changes in valuation allowance
► Consistency of assumptions
► Consistency of accounting with management’s discussion
and analysis
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26. UTPs
► SEC comments:
► Compliance with disclosure requirements
► Proposed adjustments
► Changes and prior disclosure
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27. Indirect taxes — contingencies
► SEC comments
► Continued focus on compliance with disclosure requirements
► Disclose the range of reasonably possible losses in excess of amount
accrued, if any, or that exposures cannot be estimated or are not
material.
► SEC staff does not object to aggregation.
► SEC staff challenges unclear disclosures.
► Changes without prior disclosure
► SEC staff will challenge “surprise” disclosures and accruals.
► Use of non-standard terms
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28. PCAOB inspections

29. PCAOB — inspections — income taxes
► PCAOB observation for auditors consistent with income
tax restatement causes:
► DTAs
► Valuation allowance
► Tax contingency reserves
► Existence, completeness and/or valuation of other income
tax accounts
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30. Income taxes
Material weaknesses
► Material weakness defined:
► “A material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility that a
material misstatement of the company’s annual or interim financial statements
will not be prevented or detected on a timely basis.”
► Reasonable possibility is defined as “reasonably possible” or “probable,” as used in
Accounting Standards Codification (ASC) 450, Contingencies (450-20-25-1)
(formerly FAS 5)
► Probable: The future event or events are likely to occur
► Reasonably possible: The chance of the future event or events occurring is more than
remote, but less than likely
► A material weakness in internal control over financial reporting may
exist even when financial statements are not materially misstated.
► Restatement (Big R) of previously issued financial statements to
reflect the correction of a material misstatement is an indicator of a
material weakness.
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31. Income taxes
Material weaknesses — nature
9%
Nature of
material weaknesses
24% Operation of control
Both (design and operation)
Design of control
67% Ernst & Young LLP analysis of public filings
disclosing material weaknesses from 2010 – Q2 2012
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32. Income taxes
Material weaknesses — causes
Lack of review
Error during preparation
Lack of expertise
Lack of resources
Oversight of third party
Foreign entity oversight
Error within data
Multiple causes
Lack of internal communication may be identified
0% 5% 10% 15% 20% 25% 30%
Frequency
Ernst & Young LLP analysis of public filings disclosing
material weaknesses from Q1 2010 – Q2 2012
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33. Income taxes — internal control key
considerations
► Understanding the process and identification of risk/control points:
► Sources of information
► Third parties (reliance, review, data)
► Unique, non-routine, infrequent classes of transactions
► Understanding controls:
► Who, when, what and how of the controls
► Control owner has appropriate authority and competence
► Management review/reconciliation controls — precision, sensitivity
evaluation, level of operation, controls ability to generate questions and
identifying errors
► Data/communication:
► Completeness and accuracy
► Accuracy of underlying reports
► Documentation
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34. Financial accounting update

35. Financial accounting
IFRS update
► SEC update on IFRS status in US:
► SEC staff issued its final IFRS Work Plan Report (the Report)
in July 2012.
► The Report does not include a recommendation to the SEC
on how and whether to incorporate IFRS into US financial
reporting.
► SEC staff indicated that many issues identified would be
partly mitigated by an endorsement approach that retains a
role for the FASB.
► No decision is expected before 2013.
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36. Financial accounting
FASB and IASB joint projects update
► FASB and IASB (the Boards) goal — improved, high-quality, converged
accounting standards
► FASB and IASB joint convergence projects:
► Leases — Exposure Draft expected by first half of 2013
► Financial instruments — Exposure Draft on classification and measurement expected by
the first half of 2013
► Financial Instruments — Exposure Drafts on impairments expected by end of 2012
► Consolidation — FASB Final Standard expected in first half of 2013
► Revenue recognition — Final Standard expected in first half of 2013
► The Boards have focused on financial instruments, revenue recognition,
leases and insurance contracts.
► Certain lower-priority projects set aside for near term
► The Boards are re-deliberating many projects, making tentative decisions.
► These decisions are subject to change as the re-deliberations progress
► Effective dates and transition methods for several joint projects have not been
finalized.
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