Memo
To: Chief Executive Officer
From: Nicholas Petrovich cc: Controller
Date: February 12, 2013
Re: Income Taxes After reviewing Deloitte (D) guidance and the requirements of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740, Income Taxes, we addressed (1.) What are the four possible sources of taxable income according to ASC 740? (2.) How much of the reversing taxable temporary differences may be considered in estimating taxable income? (3a.) In evaluating the income LOL is projecting related to future operations, is LOL in a cumulative loss position? (3b.) May LOL exclude the impact of the impairment of the non deductible goodwill when estimating future taxable income? (3c.) May LOL …show more content…

According to ASC 740-10-30-23 a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome. Figure 2 below shows LOL is currently operating in a cumulative loss position due to 750 million dollar goodwill impairment:

Income before taxes With impairment in millions Without impairment in millions
2008 150 150
2009 100 100
2010 -700 50
Cum -450 300

May LOL exclude the impact of impairment of the nondeductible goodwill when estimating future taxable income?
According to Deloitte (D) 4.239 when estimating future income or loss in recent years, an entity should generally not consider the effects of discontinued operations, cumulative effects of accounting changes, extraordinary items, and nonrecurring items included in its three-year historical amounts of pretax income or loss from continuing operations. Generally, these items are not relevant items of historical income or loss and are not indicative of an entity’s ability to generate taxable income in future years. Examples of nonrecurring items that are typically excluded include:
1. One-time restructuring charges that permanently remove fixed costs from future cash flows.
2. Large litigation settlements or awards that are not expected to recur in future years.
3. Historical interest expense on debt that has been restructured or refinanced as of the date the financial statements are issued.
4. Historical fixed costs that have been