On the advice of its tax accountants, company A has entered into a tax saving arrangement scheme that it believes is legal and has a reasonable belief that the IRS will accept the arrangement.

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Deferred tax uncertainties

On the advice of its tax accountants, company A has entered into a tax saving arrangement scheme that it believes is legal and has a reasonable belief that the IRS will accept the arrangement.
The tax saving arrangement has created a tax loss carry forward of $10 million. Company A believes (90% certain) that if these tax losses are agreed to by the IRS it will have sufficient future taxable income to absorb these tax losses at a future tax recovery rate of 35% ($3.5million in benefits). Naturally there is a possibility that the IRS might refuse some or all of the schemes giving rise to tax loss carryforward.
The tax accountants have looked at the possible outcomes and they feel that there is a 20% chance that the IRS will refuse to allow any deduction and outlaw the scheme entirely. They reckon that there is a 40% chance that the scheme will be fully successful and the tax losses will be agreed in full. There is also a possibility that a significant propotion of the tax losses ill be agreed as deductible through negociation with the IRS if the scheme is questioned. The accountants estimate that there is a 40% chance of about $6million of the losses being accepted as deductible.

Question: What tax loss carryforward figure should the company A have on its balance sheet and does it require any valuation allowance against this amount? Refer FASB.

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