Lucent Technologies Deferred Taxation

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Executive Summary

This memorandum is intended to communicate the deferred tax issues of Lucent Technologies Inc. on the basis of analysis of the veracity of the situation according to the reporting framework’s guidelines to anticipate unfavorable implications that had been resulted due to poor performance of the company over the past years. The Financial Accounting Standards Board (FASB) is the recognized body for making pronouncements as Generally Accepted Accounting Principles (GAAPs) in the United States. The FASB has promulgated Statement of Financial Accounting Standard # 103 “Accounting for Income Taxes” which specifically prescribes the treatment of income taxes of corporate entities and guidance for how deferred taxes should be recorded either an asset or a liability in the financial statements. It also provides assistance in certain cases requiring a valuation allowance to be used to reduce the carrying value of any deferred tax asset for which it was “ more likely than not” that the asset would not be realized.

The main reason behind the issue is the impact of cut-throat competition in the telecom industry and downturn in the economic conditions which had adversely affected the company’s overall financial performance as a result deferred taxes amounting to $ 7.6 billion as of September 30, 2011 have been recognized against deductible temporary differences, operating losses and tax credit carry forwards. However, under the prevailing circumstances, it is apparent that the company will not be able to generate positive taxable income in the future 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 probable through persuasive and reliable evidence that the asset will not reduce future taxable income

Analysis

Since after the inception of its operations in November 1995, the quality production and innovation were key business success factors. However, eventually with the passage of time the entry of new firms in the telecom industry such as Alcatel, Ciena, Cisco, Ericsson, and Motorola Inc., have intensified the level of competition. As a result of this most industry participant opted to strengthen their relationships with large service providers, as they represented over 70% of global carrier spending. The collapse of competitive local exchange carriers and other competitors of incumbent carriers had resulted in fewer customers. In addition the large service providers, has been consolidating, thus giving the remaining service providers additional buying power. Furthermore, as service providers continued 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, brand recognition and established relationships with global service providers. These competitors were able to offer 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 company’s financial year ending September 30, 2001, Lucent had lost $16 billion placing its retained earnings into a net deficit. Subsequently, in the first and seconds quarters of fiscal 2002, the trend continued with losses of $423 million and $495 million respectively. 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...
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