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In evaluating the ability to recover deferred tax assets, our management considers all available evidence, including
taxable income in open carry back years, the existence of cumulative losses in the most recent years, forecasted
earnings, future taxable income exclusive of reversing temporary differences and carryforwards, future taxable temporary
difference reversals, and prudent and feasible tax planning strategies. In the event we determine it is not more likely than
not that we will be able to realize all or part of our deferred tax assets in the future, a valuation allowance would be
charged to earnings in the period such determination is made. Likewise, if it is later determined that it is more likely than
not that those deferred tax assets would be realized, the previously provided valuation allowance would be reversed.
Future economic conditions and market volatility, including increases in interest rates or widening credit spreads, can
adversely impact the Company’s tax planning strategies and in particular the Company’s ability to utilize tax benefits on
previously recognized capital losses. Our judgments and assumptions are subject to change given the inherent
uncertainty in predicting future performance and specific industry and investment market conditions.
Interest rates and credit spreads in both the United States and Japan are not the only factors that impact the
Company’s unrealized gain/loss position and the evaluation of a need for a valuation allowance on the Company’s
deferred tax asset, but they do have a direct and significant effect on both. Based on our methodology described above
for evaluating the need for a valuation allowance, we have determined that it is more likely than not that our deferred tax
assets will be realized in the future, therefore we have not recorded a valuation allowance as of December 31, 2016.
See Note 10 of the Notes to the Consolidated Financial Statements for additional information.
New Accounting Pronouncements
During the last three years, various accounting standard-setting bodies have been active in soliciting comments and
issuing statements, interpretations and exposure drafts. For information on new accounting pronouncements and the
impact, if any, on our financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial
Statements.
40
RESULTS OF OPERATIONS
The following discussion includes references to our performance measures, operating earnings and operating
earnings per diluted share, which are not calculated in accordance with U.S. GAAP. These measures exclude items that
we believe may obscure the underlying fundamentals and trends in our insurance operations because they tend to be
driven by general economic conditions and events or related to infrequent activities not directly associated with our
insurance operations. Our management uses operating earnings and operating earnings per diluted share to evaluate
the financial performance of our insurance operations on a consolidated basis, and we believe that a presentation of
these measures is vitally important to an understanding of our underlying profitability drivers and trends of our insurance
business.
Aflac defines operating earnings (a non-U.S. GAAP financial measure) as the profits derived from operations.
Operating earnings includes interest cash flows associated with notes payable but excludes items that cannot be
predicted or that are outside of management's control, such as realized investment gains and losses from securities
transactions, impairments, and derivative and hedging activities; nonrecurring items; and other non-operating income
(loss) from net earnings. Aflac's derivative activities are primarily used to hedge foreign exchange and interest rate risk
in our investment portfolio as well as manage foreign exchange risk for certain notes payable and forecasted cash flows
denominated in yen. We define operating earnings per share (basic or dilutive) to be operating earnings for the period
divided by the average outstanding shares (basic or dilutive) for the period presented.
Because a significant portion of our business is conducted in Japan and foreign exchange rates are outside of
management’s control, we believe it is important to understand the impact of translating Japanese yen into U.S. dollars.
Operating earnings and operating earnings per diluted shares excluding current period foreign currency impact are
computed using the average yen/dollar exchange rate for the comparable prior year period, which eliminates dollar
based fluctuations driven solely from currency rate changes.
The following table is a reconciliation of items impacting operating earnings, net earnings, operating earnings per
diluted share, and net earnings per diluted share to the most directly comparable U.S. GAAP measures for the years
ended December 31.