WESTIN SUN INSURANCE COMPANY Accounting and Reporting for the Tax Benefit of an Operating Loss Carryforward C10-39 Westin Sun Insurance Company is a diversified insurance and financial services company. Westin also has interests in real estate development and technological enterprises. Beginning in the fiscal year ending November 30, 20X1, Westin began recognizing the tax benefit of a tax loss carryforward generated in the same fiscal year in its financial statements. Westin reported $17 million of tax benefits recoverable in its November 30, 20X1, balance sheet and a like amount in its earnings statement for the year then ended. The tax benefit represented approximately 30 percent of net income and was measured by using the enacted marginal tax rate applicable in the period that Westin expected to realize the tax benefit. Westin could not carry back the current year net operating loss because taxable income in the prior years eligible for carry- back had previously been offset by a net operating loss deduction. For financial reporting purposes, Westin has reported net income in 7 of the past 10 years. However, for income tax purposes, Westin reported a net operating loss for the year ended November 30, 20X1. The pri- mary differences, excluding temporary differences, between pretax accounting income and taxable income are tax-exempt interest and excludable dividends earned by Westin. Westin's management further explained that the tax-exempt interest and excludable dividends could not be used to offset losses gener- ated by nonlife insurance operations of Westin. Westin has earned a substantial amount of its tax-exempt interest and excludable dividends from funds held for future casualty and property claim payments. Westin's management believes that it is appropriate to recognize the tax benefit of the loss carryforward arising in the fiscal year ending November 30, 20X1, in its November 30, 20X1, financial statements. The company points out that it has elected consolidation for income tax purposes. This will mean that prof- itable life insurance company operations will offset nonlife insurance company losses. Also, it is expected that future operations of nonlife insurance companies will become profitable and start generating taxable income. Westin does not anticipate a problem in the realization of the tax benefit of the operating loss car- ryforward within the newly enacted 20-year period. Required 1. Discuss the circumstances when it is appropriate to recognize a deferred tax asset for an operating loss carryforward. 2. Assuming that it is appropriate for Westin to recognize the tax benefit of the operating loss in its November 30, 20X1, financial statements, identify how the tax benefit should be reported. 3. What tax-planning strategies are available to Westin for realizing the tax benefit of the operating loss carryforward? 4. What should Westin do if it recognizes the deferred tax asset for the operating loss carryforward and then concludes it is more likely than not that realization of some or all of the deferred tax benefits will not occur?

Accounting and Reporting for the Tax Benefit of an Operating Loss Carryforward Westin Sun Insurance Company is a diversified insurance and financial services company. Westin also has interests in real estate development and technological enterprises. Beginning in the fiscal year ending November 30,20X1, Westin began recognizing the tax benefit of a tax loss carryforward generated in the same fiscal year in its financial statements. Westin reported $17 million of tax benefits recoverable in its November 30,201, balance sheet and a like amount in its earnings statement for the year then ended. The tax benefit represented approximately 30 percent of net income and was measured by using the enacted marginal tax rate applicable in the period that Westin expected to realize the tax benefit. Westin could not carry back the current year net operating loss because taxable income in the prior years eligible for carryback had previously been offset by a net operating loss deduction. For financial reporting purposes, Westin has reported net income in 7 of the past 10 years. However, for income tax purposes, Westin reported a net operating loss for the year ended November 30,201. The primary differences, excluding temporary differences, between pretax accounting income and taxable income are tax-exempt interest and excludable dividends earned by Westin. Westin's management further explained that the tax-exempt interest and excludable dividends could not be used to offset losses generated by nonlife insurance operations of Westin. Westin has earned a substantial amount of its tax-exempt interest and excludable dividends from funds held for future casualty and property claim payments. Westin's management believes that it is appropriate to recognize the tax benefit of the loss carryforward arising in the fiscal year ending November 30,201, in its November 30,201, financial statements. The company points out that it has elected consolidation for income tax purposes. This will mean that profitable life insurance company operations will offset nonlife insurance company losses. Also, it is expected that future operations of nonlife insurance companies will become profitable and start generating taxable income. Westin does not anticipate a problem in the realization of the tax benefit of the operating loss carryforward within the newly enacted 20 -year period. Required 1. Discuss the circumstances when it is appropriate to recognize a deferred tax asset for an operating loss carryforward. 2. Assuming that it is appropriate for Westin to recognize the tax benefit of the operating loss in its November 30,201, financial statements, identify how the tax benefit should be reported. 3. What tax-planning strategies are available to Westin for realizing the tax benefit of the operating loss carryforward? 4. What should Westin do if it recognizes the deferred tax asset for the operating loss carryforward and then concludes it is more likely than not that realization of some or all of the deferred tax benefits will not occur