62 Understanding the Numbers
charge; decreasing it, a benefit. The prospects for realization of the tax benefit
must have declined for Micron Technology but improved for First Aviation
Services.
Both the Fairchild Corporation and M.A. Hanna Company tax benefits
were the result of reducing previously recorded tax obligations. Subsequent in-
formation indicated that the liabilities where overstated. The liability reduc-
tion was offset by a comparable reduction in the tax provision. This benefit
should also be viewed as nonrecurring.
Pall Corporation has a tax reduction that is associated with operations lo-
cated in Puerto Rico. In fact, most firms with operations in other countries
produce such tax benefits. Foreign states offer these benefits to encourage
companies, typically manufacturing companies, to locate within their borders.
In many cases these benefits are for a limited period of time, though renewals
are sometimes possible. As a result, while the benefits are real, there remains
a possibility that they will cease at some point. In fact, Pall Corporation dis-
closed just such a change in its income tax note:
The Company has two Puerto Rico subsidiaries that are organized as “posses-
sions corporations” as defined in Section 936 of the Internal Revenue Code.
The Small Business Job Protection Act of 1996 repealed Section 936 of the In-
ternal Revenue Code, which provided a tax credit for U.S. companies with op-
erations in certain U.S. possessions, including Puerto Rico. For companies with
existing qualifying Puerto Rico operations, such as Pall, Section 936 will be
phased out over a period of several years, with a decreasing credit being avail-
able through the last taxable year beginning before January 1, 2006.This change in U.S. tax law means that previous tax benefits from the opera-
tions in Puerto Rico are not sustainable. When a company reports tax benefits
because of operations in other countries, the possibility that the benefits might
end or be reduced should be considered.
NONRECURRING ITEMS IN THE OTHER INCOME
AND EXPENSE NOTE
An “other income (expense), net,” or equivalent line item is commonly found in
both the single- and multistep income statement. In the case of the multistep
format, the composition of other income and expenses is sometimes detailed on
the face of the income statement. In both the multi- and single-step formats,
the most typical presentation is a single line item with a supporting note. Even
though a note detailing the contents of other income and expense may exist,
companies typically do not specify its location. Other income and expense
notes tend to be listed close to the end of the notes to the financial statements.
The other income and expense note of The Sher win-Williams Company is
provided in Exhibit 2.20. The balance (income) of the Sher win-Williams other
income and expense note shows a modest increase between 1997 to 1998 and