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 for a 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

When recognizing a valuation allowance for a deferred tax asset, a company must consider all positive and negative information to determine if the asset will be realized, with the correct approach being to recognize a valuation allowance when there is substantial uncertainty about future taxable income.

Step-by-step explanation:

When dealing with the recognition of a valuation allowance for a deferred tax asset, a company is required to consider all available positive and negative information to determine whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The correct answer is: a. consider all positive and negative information in determining the need for a valuation allowance.

This approach takes into account, among other things, the company's past earnings history, estimated future taxable income, feasible and prudent tax planning strategies, and the time period over which the deferred tax assets are expected to be realized. A valuation allowance should be recognized when there is significant uncertainty that the company's future taxable income will be sufficient to realize the deferred tax asset.