The complete financial statements of Stora Enso Oyj for the company’s year ended December 31, 2009

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