Specially, regarding the size of the valuation allowance, why possible alternatives were not selected?

ACCT 352 Research Case –Spring 2020BackgroundAdvanced Chemical Industries (ACI) is a leading pharmaceutical company. ACI only operates in the US. Excluding the deferred tax asset, ACI total assets are $3.5 million.ACI was a profitable company. In 2018, ACI began reporting a net loss (both book and tax loss), which has been primarily attributable to significant research and development costs. Now it is 2020. The following table presents the loss figures for ACI. ACI’s relevant statutory tax rate is 21% and the company did not have any permanent book-tax differences during 2018, 2019 or 2020. ACI did not establish a valuation allowance to offset the deferred tax asset in 2018 or 2019.201820192020Pretax book loss$ (900,000)$(1,890,000)$(775,000)Net temporary differences(210,000)(60,000)(110,000)Taxable loss(1,110,000)(1,950,000)(885,000)Statutory tax rate21%21%21%Impact on the deferred tax asset balance233,100409,500185,850Net loss (after tax)*$(666,900)$(1,480,500)$(589,150)Deferred tax asset balance$233,100$642,600$828,450Valuation allowance*––?ACI is assessing the need to record a valuation allowance to offset the deferred tax asset balance created by the net operating loss carryforward. While the company has reported losses in the past three years, management anticipates positive income in the future. The executives of ACI do not anticipate any fundamental shift in its business operations in the future. The company is currently in the final research and development stage of a new drug that has tremendous market opportunity. Management believes that this drug will be on the market within three years based on the company’s past experience. The income projections for the next five years prepared by the CFO are presented below. The CFO determined that, while NOL can be carried forward indefinitely,predicting numbers beyond the 5-year period was impractical. However, the CFO does anticipate positive taxable income in 2026 and beyond, because the new drug can bring long-term profit and there lacks of any known competing drugs. The CFO has been with ACI for his entire career and has been extremely competent in terms of preparing income projections and meeting forecasts. The income effect of the new drug is based on information gathered when its most recent significant drug was released. There have beenno actual or expected changes in tax laws indicating a potential change in the statutory tax rate. The projections provided have been shared with analysts and investors. The CFO obtained a schedule for the existing taxable temporary differences relating to the gross deferred tax liability at December 31, 2020. This schedule was reviewed by the tax director. The schedule indicated that there would be no reversals scheduled in the foreseeable future. 20212022202320242025Pretax book loss, excludingnew drug$(750,000)$(600,000)$ (525,000)$ (490,000)$ (350,000)Income effect of new drug2,000,0003,500,0003,750,000Pretax book (loss) income(750,000)(600,000)1,475,0003,010,0003,400,000Net temporary differences(110,000)(110,000)(110,000)(110,000)(150,000)Future taxable (loss) income(860,000)(710,000)1,365,0002,900,0003,250,000Limitation on carryforwards80%80%80%Future taxable income available to offset carryforward1,092,0002,320,0002,600,000*Statutory tax rate21%21%21%21%21%Impact on deferred tax asset balance180,600149,100(229,320)(487,200)(441,630)*Beginning of year deferred tax asset balance828,4501,009,0501,158,150928,830441,630End of year deferred tax asset balance$1,009,050$1,158,150$ 928,830$ 441,630$ –*For 2025, there is only $441,630 left in the deferred tax asset account balanceAs the junior accountant, the CFO has asked you to provide him withan analysis of the need for a valuation allowance account for the deferred tax asset. The CFO has informed you that the tax director has said that ACI does not have any available tax-planning strategies to realize the deferred tax asset. The CFO has suggested that beyond looking at ASC 740 for guidance on this determination, she also recommends that you read paragraphs 99 through 103 in the Basis for Conclusions in SFAS No. 109.RequiredFor December 31, 2020, using your judgment, perform an analysis of the need for avaluation allowance to offset part, or all, of the deferred tax asset created by the net operating loss carryforward. Document your judgment in a draft memorandum format that you will provide to the CFO (not to exceed 2-3 pages,double space, 12 font size). Always include references to the applicable guidance. Upon completing your documentation, make certain that you are able to address the following considerations:–Is the documentation sufficient to support your judgment?Specially, regarding the size of the valuation allowance, why possible alternatives were not selected?–Can another professional, possibly outside of the accounting field,understandwhat you are trying to say, as well ashow you reached your conclusion?