Lufthansa Group operates an international airline based in Germany. Lufthansa files its annual reports under International Financial Reporting Standards (IFRS). In its 2012 Annual Report to shareholders, Lufthansa presented the following information in a note to the financial statements:
Deferred tax items In accordance with IAS 12, deferred taxes are recognized for all temporary differences between the balance sheets for tax purposes of individual companies and the consolidated financial statements. Tax loss carry-forwards are recognized to the extent that the deferred tax assets are likely to be used in the future. Company earnings forecasts and specific, realizable tax strategies are used to determine whether deferred tax assets from tax losses carried forward are usable or not, i.e. whether they have a value that can be realized. The total amount of deferred tax assets that could not be capitalized as of 31 December 2012 was EUR 498m (previous year: EUR 633m).
Required:
1. Does Lufthansa report a valuation allowance relating to its deferred tax assets? If so, how much is it? If not, why not?
2. Why was Lufthansa not able to capitalize €498 million of deferred tax assets as of December 31, 2012?
3. In its 2012 Annual Report, AMR Corp., which operates American Airlines and reports under U.S. GAAP, reported an increase in its deferred tax valuation allowance of $282 million (approximately €212 million as of December 31, 2012). a. Did Lufthansa experience a similar increase?
b. What does this likely indicate about Lufthansa's ability to recover its deferred tax assets relative to AMR Corp.?