What is Valuation allowance (deferred tax assets)?
In short
A valuation allowance reduces a deferred tax asset when it is more likely than not (a likelihood of more than 50%) that some or all of the asset won't be realized.
Key takeaways
- Evidence includes future reversals of taxable temporary differences, tax-planning strategies and expected future taxable income.
- A history of recent losses is significant negative evidence.
- Changes in the allowance usually flow through income tax expense.
Where it's tested
FAR: Income Taxes (Deferred Tax Accounting) — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company has a $300,000 deferred tax asset related to a net operating loss carryforward. Based on a recent history of losses, management concludes it is more likely than not that only $100,000 of this asset will be realized. What should the company record?