224  Reorganizing the Financial Statements 
UPS’s decision to withdraw from a multiemployer pension plan in 2012 
caused its compensation and benefits expense to spike that year. Since the 
withdrawal was a one-time event, it is better evaluated separately as a nonop-
erating expense and not embedded in operating income. Choosing whether an 
expense is one-time or ongoing requires judgment. Separating one-time items 
from ongoing expenses, however, highlights trends and opens the valuation 
discussion to future risks.
Operating Cash Taxes  Since many nonoperating items affect income taxes, 
they also must be adjusted to an all-equity operating level. The process for ad-
justing taxes is the most complicated part of reorganizing the financial state-
ments. Chapter 20 goes into more detail about the specifics of the process, 
the reasoning behind it, and alternative ways to implement it. For now, we 
summarize the process.
To determine operating taxes, you will need the tax reconciliation table 
from the company’s notes. Some companies report the tax reconciliation table 
in percent; others report the table in currency. In Chapter 20, we present how 
to estimate operating taxes using both reporting styles. Exhibit 11.10 presents 
the tax reconciliation table for Costco.
To estimate operating cash taxes, proceed in three steps:
1. Using the tax reconciliation table, determine the statutory tax rate. 
The statutory tax rate equals the government tax rate paid on income. 
­Multiply the statutory tax rate by adjusted EBITA to determine statutory 
taxes on adjusted EBITA.
2. Increase (or decrease) statutory taxes on EBITA by other operating taxes (or 
credits). To estimate other operating taxes, search the tax reconciliation table 
for ongoing, operating-related taxes other than statutory taxes. The most 
EXHIBIT 11.10  Costco: Tax Reconciliation Table
$ million
2015
2016
2017
2018
2019
Federal taxes at statutory rate
1,262
1,267
1,414
1,136
1,001
State taxes, net
85
91
116
154
171
Foreign taxes, net
(125)
(21)
(64)
32
(1)
Employee stock ownership plan (ESOP)
(66)
(17)
(104)
(14)
(18)
2017 tax act
—
—
—
19
(123)
Other
39
(77)
(37)
(64)
31
U.S. and foreign tax expense (benefit)
1,195
1,243
1,325
1,263
1,061
Tax rates1
Federal income tax rate, %
35.0
35.0
35.0
25.6
21.0
State income tax rate, %
2.4
2.5
2.9
3.5
3.6
Statutory tax rate, %
37.4
37.5
37.9
29.0
24.6
1 To determine each tax rate, divide each tax amount by earnings before taxes. Earnings before taxes are reported in Exhibit 11.8.
Source: Reported in Costco’s annual report, note 8: Income Taxes.

Reorganizing the Accounting Statements: In Practice  225
common operating tax is the difference between domestic and foreign tax 
rates. Sum the other rates deemed operating, and if the table is presented in 
percent, multiply the resulting summation of by earnings before taxes (EBT). 
Multiplying the percentages by EBT (not EBITA) converts the percentages 
found in the tax reconciliation table into a dollar-based adjustment.8
3. Convert accrual-based taxes into operating cash taxes. For companies that 
systematically defer taxes, accrual-based taxes will not properly represent 
cash taxes actually paid. The simplest way to calculate operating cash 
taxes is to subtract the increase in operating deferred-tax liabilities (net of 
assets) from operating taxes. While the notes provide information on taxes 
that have been deferred, they do not separate operating from nonoperat-
ing deferred taxes, making the disclosure unusable. Not every company 
discloses enough information to separate operating deferred taxes, such 
as accelerated depreciation, from nonoperating deferred taxes, such as 
those related to prepaid pension assets. When this information is unavail-
able, we recommend using operating taxes without a cash adjustment.
To demonstrate the three-step process, we construct operating cash taxes 
for Costco in Exhibit 11.11. In 2019, the statutory tax rate for Costco was 24.6 
EXHIBIT 11.11  Costco: Taxes
$ million
2015
2016
2017
2018
2019
EBITA
3,697
3,747
4,168
4,554
4,828
× Statutory tax rate1
37.4%
37.5%
37.9%
29.0%
24.6%
Statutory taxes on EBITA
1,382
1,406
1,579
1,322
1,187
Foreign taxes, net2
(125)
(21)
(64)
32
(1)
Employee stock ownership plan (ESOP)2
(66)
(17)
(104)
(14)
(18)
Operating taxes
1,191
1,368
1,411
1,340
1,168
Operating taxes deferred3
(7)
(219)
82
115
(159)
Operating cash taxes
1,184
1,149
1,493
1,455
1,009
Reported taxes
Operating taxes
1,191
1,368
1,411
1,340
1,168
Taxes related to nonoperating accounts4
(35)
(48)
(49)
(32)
(15)
Other nonoperating taxes5
39
(77)
(37)
(45)
(92)
Income taxes, reported
1,195
1,243
1,325
1,263
1,061
1 Estimated by dividing federal plus state income taxes by earnings before taxes.
2 Reported in the tax reconciliation table presented in Exhibit 11.10.
3 Computed as the increase (decrease) in operating deferred tax assets, net of liabilities. Operating deferred taxes are reported in Exhibit 11.7.
4 Estimated in Exhibit 11.9.
5 Other nonoperating taxes include taxes related to the 2017 tax act and other taxes, reported in Exhibit 11.10.
8 When adjusting statutory taxes on EBITA for other operating items, we prefer to use dollar adjust-
ments rather than percentage adjustments. This is because artificially low earnings before taxes can 
distort the percentages in a significant way. For instance, when UPS withdrew from the multistate pen-
sion plan in 2012, adjustment percentages related to foreign tax savings were uncharacteristically large 
because of the smaller-than-usual EBT.