Lucent Technologies Deferred Taxation

11. Investors and creditors are particularly interested in this financial statement because it tells them what is happening to the company’s most important resource?

| The flexibility in U.S. GAAP gives management discretion to use its professional opinion to choose from a range of guidelines and standards in selecting those that suit the needs of a company (e.g., FIFO or LIFO inventory methods).

* 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.

Dan and Patrick Zimbrick, sole shareholders of Osprey Corporation have been required to repay compensation to Osprey Corporation that was found by the IRS to be excessive. In order to determine how these repayments are to be treated for tax purposes, it is important to note that in 2006 the board of directors made up of Dan, Patrick and their uncle John, adopted a legally enforceable resolution. The resolution stipulated that any overpayment of salary disallowed as a deduction by the IRS would be repaid to the Osprey Corporation. In late 2010 during an audit by the IRS,

Income statements and balance sheets were reviewed to summarize the following key points that could

There presents some positive evidence to avoid the recording of valuation allowance. First, Packer, Inc has a profitable operation history from 1995 to 1997, despite a significant loss in 1994. This is agreed by FASB, which states that a “strong earnings history coupled with evidence indicating that the loss (for example, an unusual, infrequent, or extraordinary item) is an aberration rather than a continuing condition” is a piece of positive evidence (FASB 740-10-30-22). These profits may be carried forward into the future to offset net-operating loss. Secondly, Packer may not generate any significant U.S Federal tax net operating loss carry forwards in the near future because it has the ability to utilize tax planning, such as capitalization of R&D. Thirdly, Packer has never lost deferred tax benefits due to expiration of a US net operating loss carry-forwards.

If an entity has a recent fair value calculation for a reporting unit, it also should include as a factor in its consideration the difference between the fair value and the carrying amount in reaching its conclusion about whether to perform the first step of the goodwill impairment test.”

The main factors that contributed to this contrasting difference are due to the changes in unrestricted tax losses and offsets. Since OZL has made a tax loss in FY2013, it is able to recognise a DTA of $109.7mil to represent a tax saving so the taxable amounts will be available in the future to utilise the temporary differences, losses and offsets. The tax loss is carried forward as a deduction against future taxable income (Leo, Hoggett, Sweeting, & Nicholson, 2012) in FY2014 by partially reversing the DTA by $35mil.

It is critical to understand that the transaction events which give rise to timing differences are economic in nature and therefore have economic consequences. The question then becomes how to best reflect those economic consequences in the financial statements. Inter-period income tax allocation considers the tax consequences of transaction events such as revenue, expenses, gains, and losses and associates these items with the period in which these events are recognized. In other words, inter-period tax allocation is consistent with the basic tenets of accrual accounting. Underlying this method is the understanding that there is a direct economic relationship between identifiable transactions reflected in the financial statements and related income tax effects (Arthur et al., 1984). Therefore, each transaction has a tax effect.

The fair value of an asset is defined as ‘the price that would be received to sell an asset paid to transfer a liability in an orderly transaction between market participants at the measurement date” (Kieso, Weygandt, & Warfield, 2012). It is a market based measure (Averkamp, 2014). Over the past few years, Generally Accepted Accounting Principles has called for the use of fair value measurement in a company’s financial statements. This is what is referred to as the fair value principle (Kieso, Weygandt, & Warfield, 2012). The fair value of an asset or liability is based on an estimate of what the asset should be worth at the time of sale. This gives rise to some conflict among accounting professionals. It is believed that fair value may not be as accurate

According to the analysts fair value accounting of assets and liabilities is more relevant as the basic economic value of instrument is clearly reflected with the use of FVA and they strongly believe that fair value and relevant volatility reflects

In relation to the Cost of Goods Sold, Lucent faces the problem that some of their goods are

Determining the true market value of an asset is sometimes controversial, especially for assets that do not have active and liquid markets. By definition, the fair value does not need the existence of an active market. In case of market inexistence, IASB offers guideline that looks at the type of assets or liabilities. For instance, for property, plant and equipment, depreciated replacement cost is recommended if market based evidence is unascertainable. For biological assets (animals and plants), IASB suggest the use of discounted present values of future cash flows (Weetman, 2011). Later, FASB introduced FASB ASC 820 – Fair Value Measurements and Disclosures (SFAS 157) (Zyla, 2010). The main aim of this statement is to offer additional guidance and information on issues that relate to fair value and its measurement. FASB ASC 820 – Fair Value Measurements, in technical terms, does not bring in any new accounting principle rather it provides financial analysts and auditors with “additional information on how the FASB intends fair value to be measure in any instance it is required in financial reporting” (Zyla, 2010). The FAS 159 – the Fair Value Option(FVO) on Financial Assets and Financial Liabilities – brings in the fair value option that a company may use in their first and successive measurements of their particular financial liabilities and

in future statements. Some of the more significant estimates include goodwill and other intangible asset impairment, allowance for

In today’s businesses, there has been an increase in the demand for financial reporting and also, the need to have reliable measurements of fair value and its disclosures. The need for reliable information has caused continuous change to accounting policies which has posed a challenge not only to management of companies, but also to auditors. The frequent changes in accounting principles pose a challenge for managers in measuring accounting estimates accurately and are an exceedingly difficult task. Fair value accounting is a financial reporting approach in which companies are required to measure and report on an ongoing basis certain assets and liabilities at estimates of the prices they would receive if they were to sell the assets or would pay if they were to settle their liabilities. Under fair value accounting, companies report losses when the fair values of their assets decrease or liabilities increase. Those losses reduce companies’ reported equity and may also reduce companies’ reported net income.