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 …show more content…

Therefore, forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in past recent years as mentioned above. Hence, cumulative losses weigh heavily in the overall assessment.

During the fiscal 2002 third quarter end review, the company should need to consider several significant developments in determining the need for a full valuation allowance including;

* The continuity and recently more severe market decline * Uncertainty and lack of visibility in the telecommunication market as a whole * A significant 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 profitability

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 company’s management to determine whether a valuation allowance is required, managers should consider all available evidence. FAS # 109 divides this evidence into negative