Valuation Allowance for Deferred Tax Assets Essay

First, on the basis of assumptions underlying the acceleration of the Company’s strategy refocus, management projects a decline in the net cash flows for the A2 Americas segment. As a result, in the third quarter of 2010, management has tested the long-lived assets of this segment for recoverability. They recorded a pretax impairment charge of $1.76 billion in cost of sales.

* In some business combinations, the acquirer has cumulative losses that caused the acquirer to conclude that a valuation allowance was required on its deferred tax assets (including net operating losses) immediately prior to the acquisition, and the deferred tax liabilities assumed in the business combination are available to offset the reversal of the acquirer’s pre-existing deferred tax assets.

When a corporation distributes appreciated property, it must recognize gain as if it sold the property for its FMV immediately before the distribution. For gain recognition purposes, a property’s FMV is deemed to be at least equal to any liability to which the property is subject or that the shareholder assumes in connection with the distribution. A corporation recognizes no loss when it distributes to its shareholders property that has depreciated in value. A corporation’s E&P is increased by any E&P gain resulting from a distribution of appreciated property. A corporation’s E&P is reduced by (a) the amount distributed plus (b) the greater of the FMV or E&P adjusted basis of any non money property distributed, minus © any liabilities to which the property is subject or that the shareholder assumes in connection with the distribution. E&P also is reduced by taxes paid or incurred on the corporation’s recognized gain, if any.

A corporation that distributes property that has appreciated in value must recognize a gain at the time of distribution. The corporation is treated as if it had sold the property. The gain equals the property 's fair market value less its adjusted basis. Code Sec. (b). However, the corporation does not recognize a loss if the property had declined in value. Also, the corporation recognizes no gain or loss if t distributes its own stock rights to its shareholders. Code Sec. (a). The character of the recognized gain depends on the property distributed; thus it may be ordinary income, capital gain, or Section 1231 gain.

(i) Prepare the calculation of deferred tax assets or deferred tax liabilities in relation to prepaid rent expense as at 31 December 2011 and 31 December 2012. (ii) Prepare journal entry to record the change in deferred tax assets or deferred tax liabilities

10-2 On the premise that the historical cost of acquiring an asset should include all costs necessarily incurred to bring it to the condition and location necessary for its intended use, in principle, the cost incurred in financing expenditures for an asset during a required construction or development period is itself a part of the asset 's historical acquisition cost. The cause-and-effect relationship between acquiring an asset and the incurrence of interest cost makes interest cost analogous to a direct cost that is readily and objectively assignable to the acquired asset. Failure to capitalize the interest cost associated with the acquisition of qualifying assets improperly reduces reported earnings during the period of acquisition and increases reported earnings in later periods.

While not defined by ASC 740, practice has generally been to consider the most recent three years when assessing cumulative losses. Positive evidence of sufficient quantity and quality would be needed to overcome this significant negative evidence and conclude that a valuation allowance is not warranted. As with all elements of available evidence, a cumulative loss is simply one data point — it is not a "bright line" test that is in and of itself determinative of the need for a valuation allowance. To illustrate, assume that a company is in a three-year cumulative income position of $10 million, but the results of the past three years have flipped from income to losses (2006: income of $100 million; 2007: loss of $30 million; 2008: loss of $60 million). Does the fact that the company is still in a three-year cumulative income position at the end of 2008 automatically suggest that a valuation allowance is not warranted? On the other hand, assume a company had previously recorded a full valuation allowance and incurred a loss of $100 million in 2008, but earned $30 million in 2009 and $60 million in 2010. Does the fact that the company is still in a

Future or deferred tax is recognised on the future tax payable on the assets and liabilities which are shown in the ‘statement of financial position’ at the end of the financial period.

25-7 If a loss cannot be accrued in the period when ti is probable that an asset had been impaired or a liability had been incurred because the amount of loss cannot be reasonable estimated, the loss shall be charged to the income of the period in which the loss can be reasonably estimated and shall not be charged retroactively to an earlier period. All estimated losses for loss contingencies shall be charged to income rather than charging some to income and others to retained earnings as prior period adjustments.”

Be informed and dispel the anomalies surrounding tax depreciation to make it a tool of financial

Accordingly, based on the two types of evidences mentioned above, the views of the SEC staff with respect to valuation allowances on deferred tax assets and the types of questions that they might ask if they reviewed the Lucent’s financial reports are as follows;

Deferred tax liability or asset = difference between income tax payable and income tax expense

c) In relation to the plant, explain the adjustment required to the deferred tax account.

All assesses are entitled to a deduction of 20% of the profit derived by them for new industrial undertakings and Hotel setup in backward area. The deduction will be allowed in respect of the ten assessment year relevant to previous year in which the industrial undertaking begins to manufacture or produce articles.

As mentioned above, when an asset is sold it may be sold in excess of the owner’s basis. When this occurs the taxpayer may be taxed on the gain at the more favorable capital gains rate (typically around 15%). What was not discussed in prior modules, was the treatment of capital gains for corporations, treatment of capital losses for both individuals and corporations, and how the length of ownership impact the classification and tax treatment of assets upon their sale.