Livingston Unitech, Inc. (LU) is a publicly traded company that is planning to undertake two R&D projects in the coming year. For business reasons, they want to undertake these projects now, although they project that they won’t have any taxable income for the current taxable year. However, they are highly confident they will eventually be able to use any tax credits before they expire. They will spend $10 million on the projects ($5 million on each) and claim a $10 million tax credit. They predict that, if the positions were examined, a $4.5 million benefit from the first project and a $1 million benefit from the second would be sustained, for a total benefit of $5.5 million. Management concludes that, because of the magnitude and distinctiveness of each project, it will accumulate information separately for each project and would address each project separately with the IRS in the event of examination. If the positions were audited, the managers believe that the credit for the first project has an 85% likelihood of being sustained, and the second has a 33% likelihood.

1: What amount(s), if any, will LU recognize on its financial statements for these projects, and, if they do recognize such amount(s), what category or categories of financial statement item will it/they be? Cite the relevant provision(s) of the FASB codification and explain why you arrived at the answer you did.

2: Suppose during the next year, the Circuit Court of Appeals in LU’s jurisdiction decides a case that causes LU’s managers to change their assessment and conclude that the second position now has a 55% likelihood of being sustained. Will LU make any change on their financial statements? Cite the relevant provision(s) of the FASB codification.