Memo
Date: 2/19/14
To: CEO of LOL
From: Auditor
Re: The realization and valuation of DTAs
Mr. CEO:
The following paragraphs explain why a valuation of temporary taxable differences is necessary and how, with the guidance of the Accounting Standards Codification (ASC), we came to this conclusion. According to ASC 740-10-30-23, "The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion or all of the deferred tax asset. A cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome." The fact that LOL is in a cumulative loss position, has experienced historic losses, and has recently lost a significant customer supports the above quote and is the foundation to our recommendation. This lack of positive evidence proves that it is more likely than not that future taxable income will not be able to fully realize the DTAs. Other components, such as sources of future taxable income, tax planning strategies, historic data, and events currently affecting future taxable income were considered in our evaluation of LOL's situation, and the evidence gathered is presented as follows.
Sources of Taxable Income:
In order to realize the tax benefit of an existing deductible temporary difference or carryforward, sufficient taxable income must exist. ASC 740-10-30-18 provides us with four possible sources of taxable income that do realize a tax benefit for deductible temporary differences and carryforwards. These sources are: ⁃ “Future reversals of existing taxable temporary differences ⁃ Future taxable income exclusive of reversing temporary differences and carryforwards ⁃ Taxable income in prior carryback years if carryback is permitted under the tax law ⁃ Tax planning strategies”
LOL does not have the ability to carryback any losses to prior periods nor does it have a history of tax
To: CEO of LOL
From: Auditor
Re: The realization and valuation of DTAs
Mr. CEO:
The following paragraphs explain why a valuation of temporary taxable differences is necessary and how, with the guidance of the Accounting Standards Codification (ASC), we came to this conclusion. According to ASC 740-10-30-23, "The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion or all of the deferred tax asset. A cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome." The fact that LOL is in a cumulative loss position, has experienced historic losses, and has recently lost a significant customer supports the above quote and is the foundation to our recommendation. This lack of positive evidence proves that it is more likely than not that future taxable income will not be able to fully realize the DTAs. Other components, such as sources of future taxable income, tax planning strategies, historic data, and events currently affecting future taxable income were considered in our evaluation of LOL's situation, and the evidence gathered is presented as follows.
Sources of Taxable Income:
In order to realize the tax benefit of an existing deductible temporary difference or carryforward, sufficient taxable income must exist. ASC 740-10-30-18 provides us with four possible sources of taxable income that do realize a tax benefit for deductible temporary differences and carryforwards. These sources are: ⁃ “Future reversals of existing taxable temporary differences ⁃ Future taxable income exclusive of reversing temporary differences and carryforwards ⁃ Taxable income in prior carryback years if carryback is permitted under the tax law ⁃ Tax planning strategies”
LOL does not have the ability to carryback any losses to prior periods nor does it have a history of tax