Essay Example on Company's Declining Revenue: Big Mart Bankruptcy & Fire Loss

The company has been experiencing declining revenues and meager net income in the past few years. The situation is contributed by the rejected orders and bad debts from Big Mart, which was the company's largest customer. Big Mart Company became bankrupt ad closed down with merchandise from our company amounting to around $4million, and during the same year, their orders dropped from 15 million to $5 million. The new location which was set to open was lost to fire, losing about $8 million inventory. The manufacturing equipment disposed of contributed to the drops and the decline in mall traffic.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Save 25%

The GAAP requires that if there is a greater than 50% probability that differed tax would not be attained, then the company is required to prepare a valuation allowance to cut down the differed asset. Some of the evidence to be used in the valuation includes the entity's current financial position and the operation results of the preceding years. Historical judgment shall be used in consideration of negative and positive evidence.

A valuation allowance is needed because the company has been reporting contrary evidence such as cumulative losses over the past years. The recorded decline in the preceding year accumulated to $150 million of the net operating loss and recorded deferred tax assets totaling $40 million for the damage which was carried forward. Other reasons include operating loss in the past and the loss that is expected in the future years. The company has restructured the facility to allow for a new product line. The system which was removed has not been replaced with similar equipment, which caused a deduction of the tax return loss of about $10 million. Another one is the unsettled circumstances, such as the modification of the business to include direct-to-customer sales online, which does not guarantee profitability.

The factors that were considered in arriving at the situation are the constant losses over the past few years. We also realized that there was no existing differed tax, From the depreciation of the company, the total deferred tax liabilities amounts to around $7 million, and we expect it to reverse in the next five years. The company is modifying the business model to assume direct-customer online sales. The change will be useful in about a year, but we are not sure how many years it would take before its profitability is realized. We are not also satisfied with the performance of the new product line. The mall traffic has also decreased because of economic downturn and therefore contributing to revenue losses.

Conclusion

Consider the proposal above and approve the $ 20 million for a valuation allowance. Evaluate all the considerations that we have used and see if it is realistic. Determine also on the forwards that we have put in place and consult with the development team on the progress to see if the projects are promising. The accounting standards codification requires the reduction in measurement of deferred tax assets and not the expected tax return to be realized. You are also allowed to use judgment to consider the relative impact of the considerations above. Also, consider that tax benefits are considered for a portion and not the entire amount in the case of deferred tax assets. Therefore, cross-check all the decisions that have been made and advise us on your conclusion.