'Lucent Technologies Deferred Taxation\r'

'Executive Summary This muniment is intended to communicate the deferred evaluate matters of luminous Technologies Inc. on the basis of analysis of the veracity of the situation according to the reporting role model’s guidelines to anticipate unfavorable implications that had been resulted callable to poor performance of the comp whatever e genuinelyplace the quondam(prenominal) years. The monetary Accounting Standards get along (FASB) is the secernate body for making pronouncements as Generally Accepted Accounting Principles (GAAPs) in the United States.The FASB has promulgated Statement of Financial Accounting Standard # 103 â€Å"Accounting for Income measure revenuees” which specifically prescribes the treatment of income measurees of corporate entities and guidance for how deferred imposees should be recorded either an summation or a liability in the financial araments. It as vigorous get outs assistance in original cases requiring a milita ry rating registration to be drilld to reduce the standing value of both deferred tax asset for which it was â€Å" much presumable than non” that the asset would not be realized.The main reason behind the issue is the reach of cut-throat competition in the telecom sedulousness and downturn in the scotch conditions which had adversely affected the company’s overall financial performance as a result deferred taxes amounting to $ 7. 6 meg as of family line 30, 2011 have been recognized against deductible temporary differences, in operation(p) losings and tax realisation carry forwards. However, under the prevailing circumstances, it is apparent that the company go protrude not be able to go affirmative dutiable income in the proximo tense periods to offset the losses.Accordingly, as per FAS # 109 the valuation readjustment has to be reviewed against potential drop tax assets and for any items in which it is more probable through persuasive a nd reliable evidence that the asset allow not reduce afterlife tense taxable income Analysis Since after the parentage of its operations in November 1995, the quality doing and innovation were key business triumph factors. However, eventually with the passage of time the instauration of new firms in the telecom industry such as Alcatel, Ciena, Cisco, Ericsson, and Motorola Inc. , have escalate the level of competition.As a result of this well-nigh industry participant opted to strengthen their relationships with heroic military service providers, as they represented over 70% of global carrier spending. The bump of competitive local ex multifariousness carriers and different competitors of incumbent carriers had resulted in fewer customers. In addition the large service providers, has been consolidating, indeed giving the rest service providers surplus buying power. Furthermore, as service providers go along to reduce their capital spending, fewer sales opportunities existed.Moreover, a number of its existing competitors were very large companies with substantial technical, engineering, and financial resources, carry recognition and established relationships with global service providers. These competitors were able to offer low prices, superfluous products or services, or new(prenominal)wise incentives. These potential competitors were also in a powerfuler localization to respond quickly to new or emerging technologies and to undertake more bulky marketing campaigns, adopt more militant pricing policies, and make more harming offers to potential customers, employees, and third-party agents.During the company’s financial year ending September 30, 2001, lucent had lost $16 billion placing its retain lolly into a net deficit. Subsequently, in the first and seconds tail ends of fiscal 2002, the ignore continued with losses of $423 trillion and $495 million respectively. As of September 30, 2001, lambent had tax credit carry f orwards of $898 and federal, state and local, and non-U. S. net operating loss carry forwards of $ 1,640 (tax effected), most of which expire mainly after the year 2019.As of September 30, 2001, bright has recorded valuation salarys totaling $ 742 against these carry forwards, to begin with in certain states and foreign jurisdictions in which Lucent has concluded it is ‘more seeming than not’ that these carry forwards will not be recognized. The components of deferred income tax assets and liabilities are as follows; Year Ended September 30, | 2001| 2000| |  | $ in ‘000’| $ in ‘000’| Deferred Income Tax Assets|  |  | | disobedient Debt and customer financing reserves| $ 1,004| $ 2|  | Inventory reserves| 685| 314| | Business restructuring reserves| 632| -|  | other(a)wise operating reserves| 536| 407|  | Postretirement and other benefits| 2,386| 2,352|  | Net operating loss/ credit carry forwards| 2,538| 240|  | Other | 636| 364| | valuation allowance| (742)| (197)| Total deferred tax assets| 7,675| 3,562| |  | | |Deferred Income Tax liabilities| | | | Pension| 1,971| 2,480| | Property, plant and equipment| 5| 417|  | Other| 521| 734| Total deferred tax liabilities| $ 2,497| $ 3,631| Keeping in view the above figures, it turned out that the company’s remaining deferred tax assets amount to $ 5. 2 billion and since it is a substantial amount the company’s management whitethorn however deal that it would be realized based on forecasted taxable income.However, as per FAS # 109, paragraph 17, issued February 1992, whereby it stipulates that a valuation is required when it is ‘more in all probability than not’ that all or a portion of a deferred tax asset will not be recognized. Therefore, forming a final result that a valuation allowance is not postulate is difficult when thither is electro damaging evidence such as additive losses in past new-made years as mentioned above. Hence, cumulative losses weigh heavily in the overall assessment.During the fiscal 2002 third quarter end review, the company should need to view several significant developments in find the need for a full valuation allowance including; * The continuity and recently more severe market decline * scruple and lack of visibility in the telecom market as a only * A significant decrease in incidental quarterly revenue levels * A decrease in sequential earnings after several quarters of sequential improvements The necessity for further restructuring and cost decrease actions to attain positive(p)ness As a result of this assessment, the company has established a full valuation allowance for its remaining net deferred tax assets as at June 30, 2002. Lucent recorded a non-cash wind up of $ 5. 83 billion, or $ 1. 70 per share, to provide a full valuation allowance on its remaining deferred tax assets as June 30, 2002. This charge was partially offset by a third q uarter income tax benefit of $282 million on a pro forma basis, and $ 505 million on as-reported basis.In enact for the company’s management to fix whether a valuation allowance is required, managers should need all available evidence. FAS # 109 divides this evidence into negative (that is, the asset is un credibly to be realized) and positive evidence. Negative evidence let ins items such as cumulative losses in recent years; a history of operating loss carries forwards expiring unused, losses pass judgment in early future years, or assets expected to puff in a single year in a cyclical business.The statement declares that forming a inference that a valuation allowance is not needed is difficult when there is negative evidence. In contrast, positive includes a strong earnings history (exclusive of any flowing loss), existing contracts that will produce taxable income in the period of the asset turnaround, or a large excess of appreciated asset value over a tax basis a nd tax supply strategies.Accordingly, based on the two types of evidences mentioned above, the views of the bit 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; * With respect to valuation allowances the second base is likely to look at the basics for having or not having a valuation allowance, the time of recording changes, or consistency with other forward-looking information * Comments relating to the adequacy of disclosures, the true descriptions of rate reconciliation items, deferred tax assets and liabilities, ambivalent ax positions, timing of reversals, or tip of net operating losses in various jurisdictions. * The SEC may also ask questions relating to contractual obligations * The SEC may also ask for clarification link up to management’s material estimates and/or judgments. It is important that changes in estimates be well d ocumented. * peril the amount of pretax income that the company call for to generate to realize the deferred tax assets. The SEC staff may ask to include an explanation of the anticipated future trends include in the company’s projections of future taxable income. Confirmation to them that the anticipated future trends included in the company’s assessment of the realizability of its deferred tax assets are the very(prenominal) anticipated future trends used in estimating the fair value of your reporting units for purposes of exam goodwill for impairment and any other assessment of your tangible and intangible assets for impairment. Disclose that the deferred tax liabilities that the company is relying on in its assessment of the realizability of its deferred tax assets will reverse in the same period and jurisdiction and are of the same character as the temporary differences giving rise to the deferred tax assets. * Indicate the genius of the uncertainty and the n ature of each event that could occur in the next twelve months that would cause the change for each significant tax position.Conclusion It has been limpid from the above analysis that Lucent has been lining poor performance and as many another(prenominal) of its assets have very long lives barely it’s still not indicative mood of future viability of these assets. Until an appropriate level of profitability is reached, Lucent should not expect to recognize any significant tax benefits in future results of its operations.The company must use judgment in considering the relative impact of negative and positive evidence. The weight habituated to the potential effect of negative and positive evidence should be commensurate with the extremity to which it can be objectively verified. The more negative evidence that exist (a) the more positive evidence is necessary and (b) the more difficult is to support a conclusion that a valuation is not needed for some portion or the inv iolate deferred tax asset.\r\n'