Response to the following problem:
Nortel Networks, the Canadian telecommunications equipment manufacturer has recently suffered large losses, creating very large tax loss carryforwards. The company also has a very sizable valuation allowance which it deducts from the tax loss carryforwards on the balance sheet. During the last quarter of 2005, it reduced the valuation allowance by $111 million. In the first quarter of 2006, however, it added back $90 million to the valuation allowance.
Required:
What do you think may have been the underlying reason for Nortel's behavior relative to the manipulation of the valuation allowance?