KPMG Deferred Tax Issues

1194 Words Apr 13th, 2015 5 Pages
KPMG Deferred Tax Issues: Valuation Allowance

Issue 1: Conclude on the appropriateness of the engagement team’s decision for valuation allowance.

1. Clarify Issues & Objectives

ASC 740-10-05-5 defines a deferred tax asset as:

A deferred tax asset is measured using the applicable enacted tax rate and provisions of the enacted tax law. A deferred tax asset is reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

ASC 740-10-05-5 also states the following:

There are two basic principles related to accounting for income taxes, each of which considers uncertainty through the application of recognition and
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Thus, a 5% increase in profit margin is not indicative of Riggers’ historical data and is not a conservative estimate.

Riggers also projects 100% rig efficiency, which assumes the rig will endure absolutely no issues, repairs, or maintenance for the next ten years. This assumption seems highly unlikely. A more conservative assumption would take into account the inevitable off-days of the rig and thereby reduce the rig efficiency projection slightly.

Additionally, the engagement team’s assessment of valuation allowance is based on the assumption that the Brazil segment of operations will cease or lose profitability after the fiscal year 2021. If, instead, we assume operations in Brazil will continue and remain profitable until further notice, the deferred asset will eventually be used to its entirety and no valuation allowance should be recognized. However, if the given assumption of ceased operations in 2021 stands, a more fair and conservative representation requires an adjustment for valuation allocation.

Given the slightly optimistic nature of the assumptions surrounding profit margin and rig efficiency, reducing both percentage values would provide more conservative estimates. If profit margin and rig efficiency were reduced to 11% and 98%, respectively, a valuation allowance of approximately