Question

Recognizing a valuation allowance for a deferred tax asset requires that a company

a. consider all positive and negative information in determining the need for a valuation allowance
b. consider only the positive information in determining the need fora valuation allowance
c. take an aggressive approach in its tax planning
d. pass a recognition threshold, after assuming that it will be audited by taxing authorities

Answer 1

A company must consider both favorable and unfavorable evidence to determine if a valuation allowance is necessary for a deferred tax asset, and establish the allowance if the asset is not likely to be fully realized. The correct answer is option a.

Step-by-step explanation:

Recognizing a valuation allowance for a deferred tax asset requires that a company consider all positive and negative information in determining the need for a valuation allowance. When evaluating whether a valuation allowance is needed, a company assesses whether it is more likely than not that some portion or all of the deferred tax asset will not be realized.

If, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax asset will not be realized, then a valuation allowance must be recognized against the deferred tax asset.