Lucent Technologies Deferred Taxation

Executive Summary This memorandum is think to communicate the deferred levy income issues of aglow(predicate) Technologies Inc. on the basis of analysis of the verity of the situation according to the reporting frameworks guidelines to anticipate negative implications that had been resulted due to despicable performance of the comp each oer the past years. The pecuniary Accounting Standards Board (FASB) is the recognized body for making pronouncements as mostly Accepted Accounting Principles (GAAPs) in the United States.The FASB has promulgated Statement of fiscal Accounting Standard 103 Accounting for Income Taxes which specifically prescribes the treatment of income tax revenuees of corporate entities and advocate for how deferred taxes should be recorded either an asset or a obligation in the fiscal statements. It too provides assistance in certain cases requiring a valuation allow to be used to reduce the postulateing value of any deferred tax asset for which it wa s much likely than non that the asset would non be realized.The main reason behind the issue is the impact of cut-throat controversy in the telecom exertion and downturn in the economic conditions which had adversely affected the gilds overall financial performance as a result deferred taxes amounting to $ 7. 6 billion as of September 30, 2011 maintain been recognized against deductible temporary differences, operational losses and tax address track down in the lead. However, under the prevailing circumstances, it is app bent that the company allow for not be able to recall positive dutiable income in the prospective periods to offset the losses.Accordingly, as per FAS 109 the valuation allowance has to be reviewed against potential tax assets and for any items in which it is more(prenominal) probable through persuasive and legitimate march that the asset will not reduce future taxable income Analysis Since after the inception of its operations in November 1995, the quality doing and innovation were key business success factors. However, eventually with the passage of clip the entry of new firms in the telecom industry such as Alcatel, Ciena, Cisco, Ericsson, and Motorola Inc. , have intensified the train of competition.As a result of this most industry participant opted to strengthen their relationships with humongous service providers, as they represented over 70% of global carrier sp containing. The collapse of competitive local throw carriers and other competitors of incumbent carriers had resulted in fewer customers. In addition the large service providers, has been consolidating, thus giving the remain service providers additional purchasing power. Furthermore, as service providers continued to reduce their capital spending, fewer gross sales opportunities existed.Moreover, a number of its existing competitors were very large companies with substantial technical, engineering, and financial resources, brand recognition and est ablished relationships with global service providers. These competitors were able to sally low prices, additional products or services, or other incentives. These potential competitors were also in a stronger position to respond quickly to new or emerging technologies and to undertake more extensive marketing campaigns, adopt more aggressive pricing policies, and make more attractive offers to potential customers, employees, and third-party agents.During the companys financial year ending September 30, 2001, Lucent had confused $16 billion placing its retained earnings into a realize deficit. Subsequently, in the first and seconds quarter of fiscal 2002, the trend continued with losses of $423 zillion and $495 million obedienceively. As of September 30, 2001, Lucent had tax credit carry forwards 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 primarily after the year 2019.As of September 30, 2001, Lucent has recorded valuation allowances totaling $ 742 against these carry forwards, primarily in certain states and external jurisdictions in which Lucent has concluded it is more likely 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 openhanded Debt and customer financing reserves $ 1,004 $ 2 Inventory reserves 685 314 descent restructuring reserves 632 - opposite 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 companys re maining deferred tax assets amount to $ 5. 2 billion and since it is a substantial amount the companys instruction may however believe 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 likely than not that all or a portion of a deferred tax asset will not be recognized. Therefore, forming a remainder that a valuation allowance is not undeniable is heavy when in that respect is negative evidence such as cumulative losses in past late years as mentioned above. Hence, cumulative losses number heavily in the overall assessment.During the fiscal 2002 third quarter end review, the company should need to consider several profound developments in ascertain the need for a wax valuation allowance including * The continuity and lately more severe market decline * Uncertainty and lack of visibleness in the telecommunication market as a whole * A evidential decrease in sequential quarterly revenue levels * A decrease in sequential earnings after several quarters of sequential improvements The necessity for further restructuring and cost reduction actions to attain favourableness 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 charge 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 quarter income tax benefit of $282 million on a pro forma basis, and $ 505 million on as-reported basis.In order for the companys worry to determine whether a valuation allowance is required, managers should consider all open evidence. FAS 109 divides this evidence into negative (that is, the asset is unlikely to be realized) and positive evidence. disconfirming evidence acknowledges item s such as cumulative losses in recent years a history of operating loss carries forwards expiring unused, losses expected in early future years, or assets expected to reverse gear in a single year in a rotary business.The statement declares that forming a conclusion 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 current 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 and tax planning strategies.Accordingly, based on the both 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 mogul ask if they reviewed the Lucents financial reports are as follows * With respect to valuation allowances the SEC is likely to look at the basics for having or not having a valuation allowance, the timing of recording changes, or union with other forward-looking information * Comments relating to the adequacy of disclosures, the actual descriptions of rate atonement items, deferred tax assets and liabilities, uncertain ax positions, timing of reversals, or expiration of net operating losses in various jurisdictions. * The SEC may also ask questions relating to contractual obligations * The SEC may also ask for glade related to managements material estimates and/or heads. It is important that changes in estimates be well documented. * Disclose the amount of pretax income that the company needs to generate to realize the deferred tax assets. The SEC staff may ask to include an explanation of the evaluate future trends included in the companys projections of future taxable income. Confirmation to them that the anticipated future trends included in the companys assessment of the realizability of its deferred tax assets are the same anticipated future trends used in estimating the fair value of your reporting units for purposes of interrogation goodwill for impairment and any other assessment of your tangible and intangible asset 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 nature of the uncertainty and the nature of each event that could follow in the next twelve months that would cause the change for each significant tax position.Conclusion It has been evident from the above analysis that Lucent has been facing poor performance and as many of its assets have very long lives yet its still not indicative 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 abandoned to the potential effect of negative and positive evidence should be competent with the extent 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 entire deferred tax asset.