This is the Deloit case 13-10 (I think). There are required 8 elements. When appropriate I need to cite codification. I have attached my handout. I am in a major hurry and will pay for speed. Thanks

Case ll lsrcome Taxes LOL (the "Company"), an SEC registrant with a calendar year-end, is a manufacturer and distributor of sports equipment. The Company was created in 1989 and is headquarrerod in Southern California. The Company has manufacturing operations and numerous sales and administrative locations in the United States. LOL files a consolidated U.S. federal tax retum. (This case will not consider the evaluation of the state jurisdictions: it will only consider the federal jurisdiction.) As LOL's auditors, you are now perfcrming the Company's year-end audit for the fiscal year ended December 31, 2010, and have the following information available to you; . LOL draft income statement and excerpt from tax footnote as of December 31" 2010 (Handout l). r A deferred tax asset realization analysis showing pre-tax book income projections (Handout 2). . The projected income schedule (realization analysis above) projects organic $rowth beginning inZALZ after stemming the decrease in pre-tax book income. . LOL does not have the ability to carryirack any losses to prior periods. . A significant customer declared bankruptcy in 2010; therefore, the Company wrote off all accounts receivable from this customer. The Company is considering the exclusion of such expense when evaluating if future income is objectively verifiable. . o The Company does not have a history of operating losses or tax credit carq,forwards expiring unused. The Company has identified the following possible tax-planning strategies: o Selling and leasing back manufacturing equipment that would result in a taxable gain of $20 million. o Selling the primary manufacturing facility at a garn to offset existing capital loss carr5rforwards. Required: o o Question I ASC 744? - What are the four possible sources of taxable income according to How much of the reversing taxable tcmporary differences may be Question 2 considered - estimating future taxable income? in Page2 o In evaluating the income that LOL is projecting related to future Question 3a operations, is LOL in a cumulative loss position (assuming LOL considers 3 years as the period over which to evaluate pretax accounting income or loss from continuing operations for cumulative losses)? r [n evaluating the fulcome that LOL is projecting related to future Question operations, may LOL exclude the impact of the impairment ofthe nondeductible goodwill when estimating future taxable income? . ln evaluating the income that LOL is projecting related to future Question 3c operations, may LOL exclude the expense from writing offthe accounts receivable from the customer who declared bankruptcy when evaluating the projections of future income? o In evaluating the income that LOL is projecting related to future Question 3d operations, the Company has projected growth in its future projections. Does the evidence of historic losses affect our ability to accept the Company's estimate of future grovith? o In evaluating ttre income that LOL is projecting related to future Question 3e operations, in an effortto satisfu your appropriate professional skepticism, what evidence might you ask for to support the Company's projections? r Would the tax-planning strategy to sell and lease back Question 4 manufacturing equipment be a tax-planning strategy that is considered prudent and feasible? Why or why not? o Would the tax-planning strategy to sell but not lease back the Question 5 primary manufacturing facility be a tax-planning strategy that is prudent and feasible? Why or why not? - 3b- - - - - - Additional Facts- Intraperiod Allocation Consideration Assume a valuation allowance of $105 million is recorded in Issue I as of December 31, 2010 ($150 million defemed tax asset (DTA) less $45 million reversing deferred tax liabilities (DTL). Further assume that during }0l0,the Company recoguized a loss of $50 million in accumulated other comprehensive income (AOCD related to a pension adjustment from a loss in investrnent value. The Company's effective tax rate absent the recognition of a valuation allowance is 37 percent. Required: o Calculate the tax effect on the loss of $50 million recognized in Question 6 AOCI in 2010. - Page 3 Additional Facts Assume a valuation allowance of $ 105 million is recorded in Issue 2010 ($150 million DTA less $45 million reversing DTLsi. I as of December 3 I , Further assurne that the Company's projection for 201 I pre-tax book income of $0 is accurate, but the Company sells a component of the business and recognizes the component as a discontinued operation. The disoontinued operations earn $20 million before tax, and the oontinuing operations lose $20 million before tax for a net pre-tax book income of $0. As described above, the Company has a full valuation allowance. Required: o Question 7a* ls there a tax benefit on t}le loss of $20 million from continuing operations? o Question 7b _. Is there a tax provision on the $20 million of income from discontinued operations? Additional Facts - Interim Reporting Assume a valuation allowance of $105 million is recorded in Issue 1 as of December 31, 2010 ($150 million DTA less $45 million reversing DTLs). Further assume that the aca:p]20ll net income before tax was $0 as projected at the end of 2010. In calculatingthe2Al2 amual effective tax rate (AETR) at the beginning of the year, the Company projected income before taxes of $40 million ($10 million per quarter). Using the effective tax rate of 37 percent, the $40 million of income would result in a tax provision of $14.8 million during TAn (53.7 million per quarter) before considering the release of the valuation allowance. In addition. assune the net operating loss carrydorward will be used as income is generated during the year resulting in annual estimated tax of $0 and an annual estirnated effective tax rate of 0 percent. Absent a release of the valuation allowance during 2012 from a change in estimate, the end of the year valuation allowance would be $90.2 million ($105 million less $14.8 million) as a result of the inoome earned in2012. In the second quafter of 2012. LOL determined that there was sufficient evidence future taxable income to satisfu the valuation assertion of the DTA. of Required: Question 8 Calculate the tax provision (benefit) that w'ould be recognized the second quarfer ot2072. Case l3-l0Ac: LOL - Income Tax Handout 1 LOL Draft Income Statement and Excerpt From Tax Footnote as of December 31,201A LOL Corporation CONSOLIDATED STATEMENT OF OPERATIONS Years ended December 31,201A,2009, and 200g (in thousands) 2010 2009 2008 Revenues, net 2,000,000 1,900,000 1,800,000 Cost of goods sold 1,400,000 1,250,000 1,200,000 Gross profit 600,000 650,000 600,000 Selling, general, and administrative expense 500,000 500,000 400,000 Goodwill impairment 750.000 Operating income (loss) lnterest expense, net lncome (loss) before provision for income taxes (650,000) 150,000 200,000 50,000 50,000 _50,000 (700,000) 100,000 150,000 Provision (benefit) for income taxes 1222 36,000 54.000 Net (loss) income ???? M,000 96,000 Copyright 2010 Deloitte Development LLC All Rights Reserved. Csse l3-l0Ac: LOL - Income Tax LOL Corporatior INVENTORY OF DEFERRED TAX BALANCES The components of net defered income taxes are as follows: Year ended December 31, 20{0 2009 (ln thousands) Deferrad income far assefs; 30,000 Allowance for doubtful accounts 100,000 Tax loss canyfonrards 100,000 20,000 Accruals and other 25,000 25,000 150,G00 150,000 (15,000) (50,000) (p0'000) (20.000) (?0'000) (95,CI00) (90,000) Defened incsme tut liabilities: Depreciation lndefi nite lived intangible assets (trademark) Prepaid expenses Net defered income taxes Valuation allowance Net defened tax asset (liabilM . (50,000) 55,000 60,000 ???? ???? 60,000 At Decernber3l, 2010, LOL had $270 million of net operating loss eanyfon*rards. Of these, $15 million are capital losses and willexpire inZAfi, and the remaining 9255 million are operating losses and willexpire in2A25. Copyr,ght2010 D*loite Developmenr LL,C Alt Rigle Rrserved. Ca.se l3-t0Ac: LOL - Income Tax Handout 2 LOL Deferred Tax Asset Reatization Analysis Showing pre-Tax Book lneome Projections LOL Gorporation Deferred Tax Asset Realization Analysis (in thousands) The documentation below was provided to the auditors as part of their audit. Pre-Tax Book Year lncome (Loss} Actual Results 2008 150,000 2009 100,000 2010 r00.000) Ptoiections Goodwill lmpairment * Adjusted PreTax Book lncome (Loss) 150.000 100,000 r50.000) 50.000 2011 2A12 2A13 2AM 2015 2016 2417 2018 2019 2020 2421 40,000 80,000 85.000 90,000 95.000 100.000 105.000 110.000 115.000 120.000 * The goodwill impaired is nondeductible. There was no basis in the goodwifl for tax purposes therefore the impairment had no direct impact on the tax provision. ln other words, the impairment of the goodwillfor book purposes does not result in a corresponding deduction for tax purposes in any period. The book expense, therefore, does not affect the resulting taxes payabte and results in an effectiveiax raie that differs (unfavorably) from the statutory tax rate. Copyrieht 2010 Dloitte Development LLC All fughts Reserved. Case l3-l0Ac: LOL Handout 3 - - Income Tax Example of LOL Pre-Tax Income Forecast Future pmjections are by their nature subjective. Projecting growth is more subjective as historic results may not have itlustrated that such growth is attainable. As iiscussed above, LOL has negative evidence related to the impairment af goodwill and the cumulative losses over the three-year period. The loss of a significant customer as a result of bankruptcy may be considered objective negative evidence as wel!. The adjusted historic results might provide evidence of future income. Such evidence might be persuasive enough to overcome the negatlve evidence. Assumptions related to growth in excess of historie results would be subjective and such subjective evidence might not be sufftcient to overcome the objective negative evidence. ln this fact pattern, the adjusted income ftom the most recent year of $S0 million would be most indicative of future results. The average adjusted ineome of $100 million may also be indicative of future results but would be tess convincing evidence than the $S0 most recent year as a result of the declining results. ln projeciing future income, LOL might use actuat expectations but then limit the expectations by the most recent yeafs results {$80 rnillion) or the average of the most rec91! three years ($100 miltion). The projected incorne for this scenaridmight appear as follows: Pre-Tax Book Year lncome fLossl Limited to Limited to $5{l million $100 million 40.ooo 50.oo0 50.000 50,000 50,000 50.000 50.000 50.000 50,000 50.000 40,o00 80,000 85,000 90.000 95.000 100.000 100.000 100.000 100.000 100.000 Praiectians 2011 2fi12 2013 2AM 2015 2A16 2417 2018 2019 2020 2421 40.000 80.000 85,000 90.000 95.000 100.000 105.000 110.000 115.000 120,000 All evaluations related to the pr{ection of future taxable income should not be formulaic but should be based on information that is consistent with expectations and supportable on the basis of evidence both objectr"ve and subjective. Copy'ight 2010 Deloitte Devcloprnent LtC AII Rigfits Reserrcd. Case l3-I0Ac: LOL - Income Tax Handout 4 - Examples of PCAOB and SEG Comments PCAOB Comments The PCAOB, in evaluating compliance with the professional standards, has focused on the need to use professionalskepticism when evaluating estimates made by management. An example of a comment made by the PCAOB regarding the evaluation of the need for a valuation is as follows: ln evaluating the reasonableness of the issuer's assertion about the realizability of the Federal NoL defered tax benefits, the engagement team failed to identify and evaluate all relevant etements of positive and negative evidence that existed at the time the engagement team issued its audit opinion and weight those elements of evidence on the basis of the extent to which such items were objectively verifiable. The engagement team's evaluation of the realizability of the Federal NOL defened tax benefits relied on future projected income. Regarding the issuefs forecasted taxable income: 1. The engagement team failed to evaluate whether the issuer had the ability to forecast income over a XX-year period with a reasonable level of accuracy in light of the uncertain current and future economic environment and the lack of any formal board approved long-term strategic plan. Ut/hile the engagement team back tested certain aspects of the issuefs forecast for 200g (compared actual to forecast), it failed to test the issuer's ability to forecast income in the outer years. This was particularly important as the Federal NOL defened tax benefits were only forecasted to begin realization during the Y year and fully realized inyear Z- 2. The engagement team failed to sufficienfly consider that cumulative losses are a form of negative evidence that is highly objectively verifiable and caries more weight than other evidence that embodies some degree of subjectivity. For this reason, whenever an enterprise has suffered cumulative losses in recent years, realization of a defened tax asset is dfficult to support if it is based on forecasts of future profitable results without a demonstrated turnaround to operating profrtability. Not only did the issuer experience cumulative losses in the prior three years but the issuer projected cumulative losses in the initial forecasted three-year period in both the normal and extreme scenarios, which increased the level of subjectivity of the projections presented as positive evidence. Other negative evidence existed that the engagement team either failed to evaluate, or to which the engagement team failed to assign appropriate weight in its evaluation of positive and negative evidence, and included but Copyright 2010 Deloitte Development LLC All Rights Reserved- Case I3-10Ac: LOL - Income Tax was not limited to the following: . . o o The current deep economic recession and lack of clarity regarding future prospects for an economic turnaround in the U.S. economy. The categorization by the engagementteam of the negative evidence associated with the credit crisis as only being "suhjectiYe." The uncertainty over potentialfuture regulatory changes facing the X-industry sector, including the potentialfor regulatory actions related to the issuer in light of its continuing losses. The issuer had foreeasted a projected cumulative loes in the first three-year period because of continuing credit losses, and the issuer has not shown an ability to forecast future credit losses. SEC Comments Examples of SEC comments on the topic are as follows: . We note during the fourth quarter of fiscal year 20X1, you recognized a full valuation allowance against your remaining net U-S. defened tax assets in the amount of $X million because of "several significant developments, which occuned during the fourth quarter of fiscal year [20X1]." Considering the significant impact this charge had on your results, it is unelear why you did not provide a comprehensive discussion regarding this charge within your footnotes and within MD&A. Please provide "'-:ti::::l;':;,,",tion or each orthe ractors that occurred during the fourth quarter of fiscal year 20Xl that led to such a material charge. What you mean by the statement, "$X million of which is an adjustment to the beginning-of-year valuation allowance as a resutt of changes of circumstances, rrtfiich caused a change in judgment regarding the realizability of the net U.S. deferred tax assets." As part of your respon$e, please tell us how you intend to revise your disclosures in future filings with regard to the fourth quarter of fiscal year 20Xl and the first quarter of fiscal year 2AX2 charges to recognize a full valuation allowance on your net U.S. and ltalian deferred tax assets. r You did not disclose why you believe that a valuation allowance is not necessary on the defened tax asset of $X mittion related to your credit defauft swap financial guaraniees. Please disclose within MD&A att of the positive and negative factors that you considered and the reasons that you concluded that it is more likely than not that the $X million in deferred tax assets will be realized. Please refer to paragraphs 20*25 ot Statement 109 {as codified in ASC 740)lar guidance. Please also disclose the status of the federal income tax treatment of credit default Copyright 2010 DeloiBe Development LLC Alt fughs R.es6rved. Case l3-I0Ac LOL - Income Ta:r swaps, whether it is a setfled or unsetfled area of tax law, and the possible range of outcomes that may result because of this uncertainty- we note your disclosrye on page x that you expect to record significant net losses for a number of years as a result of the amortization of finite lived intangibles and non-cash equrty based compensat[on. ln tight of your expected losses, please revise your firing to describe how you consiieiea i,rr"gr"'pr, ii(ol of. statement 109 (as codified in ASC T4g) in determining that no valuation allowanee was necessaly on gx miilion defened tax assEts as of December 31, 2AX1. Copyright 2010 Deloitte Development LLC A1l RightsReserved