The FASB 109 Application – Accounting for Income Taxes Essay

The FASB 109 Application – Accounting for Income TaxesBased on the given information regarding Graphic, Inc, some positive and negative evidences can be drawn in order to determine the need to have or not to have a valuation allowance as to the Company’s deferred tax asset.Some of the positive evidence that the Company inhibits include the following:1.       Positive trend in sales of the Company caused by the launch of its new flagship product, the G-1000, and in fact, forecasting a growth in the net income in the succeeding fiscal year amounting to net operating income (NOI) of $15.

5 million;2.      Probability of closing a deal with the Sports Magazine that can steadily feed the Company with a recurring $20 million worth contract, approximately a net operating income of $2.5 million following the 2005 NOI to sales ratio ; and3.      Possibility of having another “Book depreciation over tax” in the coming years, just like the case in 2005 adding to the taxable income amount.On the other hand, some of the negative evidence observable from the current situation of the Company that could favor the valuation allowance include the following:1.

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      The fact the Company has recently “wasted” some of its deferred tax asset by allowing them to expire unused, amounting to $27,600 only for 2005; and2.      The period to use the deferred tax asset is so short that there is a very limited chance to have them indeed realized.Since judgment as to the weighing of the evidences previously presented, and it is very obvious that both the positive and the negative evidences are present,  other factors such as intuition and observation of the outside factors (i.

e., industry trend, economic situations) may affect the decision. Still, the deciding individual, usually the manager, has the ultimate say whether the deferred tax asset need be adjusted for valuation allowance or not.Assuming the point of view of the manager, and based on the above list of evidences, it would be safe to weigh the positive evidence over the negative. The total expiring deferred tax asset for 2006 amounts to $40 million, $20 million from the 2004 DTA and another $20 million from the 2005 DTA.

The forecasted net income for the next year is $15.5 million not counting the probable annual contract with Sports Magazine. All in all, possible income before tax can reach up to $18 million leaving still a difference of $22 million available DTA.Given the benefit of the valuation allowance, which in effect diminishes the amount of deferred tax asset but increases the income tax expense of the Company resulting to a reduced income from operations, it is good to utilize this opportunity to reduce taxable income as well. In the case of Graphic, Inc.

, a partial, let’s say 50%, valuation allowance of $20 million would not hurt and would be not heavily risky. After all, forecasted maximum income would still be covered by the net remaining DTA.Detailed research and enough information for the deciding manager would be a great help when considering a release of the valuation allowance. Informed judgment is always a strong weapon when one (the manager in this case) is confronted with similar situations as presented in the case of Graphic, Inc., whether to have the valuation allowance against the DTA or not. 

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