* The Rose Company is a public company and is preparing for its 2nd quarter close and issuance of its 10Q as of June 30, 2015
* Rose is multi-national and operates in 10 countries
* Rose recorded a material valuation allowance against deferred tax assets in the US jurisdiction (federal and state) during the year ended December 31, 2010
* No other valuation allowances were recorded
* Rose based its decision to record the VA primarily on the following factors:
o Went into a cumulative loss 4 years ago
o Economy was not looking good - severely impacted by the recession
o Consumer demand was decreasing
o High fixed cost structure due to labor costs negotiated with union and inability to source labor in low cost jurisdictions
* Rose recognized a substantial capital loss on its 2013 tax return that resulted in a Carryover
* Rose has NOLs in the US and in several states that will start to expire by 2025
* Rose has a significant DTL for goodwill with no tax basis
* Rose underwent an ownership change several years ago and has a NOL that is subject to annual limitations in an amount less than the NOL.
* Rose has a significant tax credit carryforward that will begin to expire, if unused, beginning in 2018. Rose believes it can implement tax planning strategies to utilize the credits before they would expire and has a demonstrated an ability to do so in prior years.
* Due to a change in management, the closing of several inefficient plants, improved labor contracts, and the outsourcing of more labor to lower cost countries, the company has returned to profitability recently.
* Recent profits have been significant and management expects this level of profitability, at a minimum, to continue for the foreseeable future.
* Rose believes its business cycle is a 4 year period as their industry is cyclical
* Rose's audit firm is starting to ask a lot of questions and challenge management on "the right time" to potentially release the valuation allowance and the potential impacts of doing so.
* The audit firm brought up the need to do a “scheduling analysis” of existing temporary differences recently, but Rose is not sure exactly what that means in the context of valuation allowances.
* Rose is hesitant to release the valuation allowance as it believes it is exposing itself to risk if the VA is released too soon (e.g., what if it has to put the VA back up the following year if there is a double dip recession?) and would prefer to leave the VA up at least through December 31, 2016 if that position can be reasonably defended.
* Rose has significant pension liabilities where a portion of the liability was recorded to Other Comprehensive Income.
* Rose expects to generate a large gain on the sale of a foreign subsidiary as early as Q3 2015 that would result in a significant amount of both ordinary and capital gain income. Management is currently analyzing whether the foreign subsidiary should be presented as Discontinued Operations.
* The tax accounting group experienced 100% turnover since December 31, 2010 so there is limited knowledge about when it's appropriate to "put up" and "take down" a VA.
* The Director of Accounting for Income Taxes is very nervous about the situation and is not confident in his ability to have a substantive discussion with the audit firm and push back on their views where warranted.
* The Director has talked to several colleagues at other companies who have told him that it's important to be in the position to not only defend that a VA release is appropriate but also that the VA release occurred in the appropriate quarter (and how it gets reported in that particular quarter if during an interim reporting period). He heard several horror stories at a recent seminar he attended about the SEC sending comment letters to companies asking for details on this type of analysis - he really wants to avoid this scenario as it would very clearly put him on the hot seat with management.
* Therefore, the Director of Accounting for Income Taxes has asked you to prepare a memorandum that addresses the technical accounting aspects of valuation allowances under ASC 740, including the evidence that must be considered in assessing the need for a VA and the potential complications of releasing the VA (the Director indicated that he's especially nervous about the intra-period tax accounting that he thinks may factor in to the analysis as this is an area he has very limited experience with).
* The Director would like the analysis to identify as many potential material issues he needs to be aware of (based on the facts provided above) and would like it to be as detailed as possible in these areas, but does not need specific numbers and scenarios to be quantified.
According to the last two bullet points, a professional memo needs to done regarding all the facts of this company. The facts need to be analyzed using the requirements of ASC 740 for valuation allowances and interim period allocations.