Valuation Allowance for Deferred Tax Assets Essay

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.”

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.

Taxable income includes a deduction for $40,000 of depreciation that exceeds the depreciation allowed for E&P purposes.

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.

* As a result of the business combination, the acquiring company determines their pre-existing deferred tax assets are more-likely-than-not to be realized by the combined entity and the valuation allowance should be reduced or eliminated.

(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.

* ASC 320-10-35-34: “An impairment loss shall be recognized in earnings equal to entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made.”

In the course of normal business operations certain transactions require specific treatment in accordance with generally accepted accounting procedures (GAAP). To properly prepare financial statements, the analysis of working papers is imperative to insuring compliance. Clarification of why information is needed about adjusting lower cost of market inventory on valuation, capitalizing interest on building construction, recording gain or loss on asset disposal, and adjusting goodwill for impairment is presented here.

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

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.

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

It’s important to call that under US GAAP, estimates of useful and residual value, and the method of depreciation, are reviewed only when events or changes in circumstances indicate that the current estimates or depreciation method are no longer appropriate. Unlike IFRS, the revaluation of property, plant and equipment is not permitted.

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.