Deferred Tax and Nortel Networks: Recognition, Losses, and Valuation Allowances, Assignments of Information Systems

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NORTEL ASSIGNMENT

For this particular problem, deferred tax is the reduction in taxes which the business has to pay and its recognition is delayed to future periods because of the fact that recognition in the future of the carryforwards and the temporary differences. This can even result in the excess tax or the tax deficit occurrence which can further lead to tax payable to the account or the tax refunded in future periods. Generally, businesses provide allowances for such type of deferred tax in a case when the probability of receiving the deferred tax is less than 50% and these changes have to be recorded in the income statement of the company[ CITATION Hea19 \l 1033 ]. This is generally done in order to protect the firm's past carryforwards expire unused or if the business is expecting the loss in the coming future. In the case of Nortel Networks which has suffered the large losses and has incurred the very large tax loss carryforwards in the first quarter of 2005 where it reduced the valuation of allowance by $111 million. The reason for the same was the huge piled up temporary difference built from the previous the deferred tax which the Nortel Networks has created for the revenue for which they according to their business has created even though the income was not realized. This is due to the fact the recognition model of the telecommunication industry and the changing dynamics of the geography too[ CITATION Mic06 \l 1033 ]. The business may have taken too much of the financing from the outside external party which may have resulted in the higher cost of the equity and the income raised by the Nortel was also not up to the mark. Even the competition has taken good control which may have disrupted the existing income channel of the Nortel Networks. However, with the rising competition and failure of the potential revenue driver, Nortel has settled the losses with the valuation allowances which their balance sheets were having. The entrance of the new valuation allowances is again from the newly funded project by the Nortel which was of the Nortel WiMax market which the higher authorities thought of again pushing it in the existing market[ CITATION Dan06 \l 1033 ]. With the new technology and the wave of the 4G also picking up company decided to take up the upcoming task and give the new route to the Nortel which in results have the large manipulations of the valuation allowances whose return the Nortel may be expecting in the future but have already entered that in their business account.