Question

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

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

Answer 1

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. The decision depends on the company's history of profits or losses and its future profitability expectations.

So the correct option is 1. consider all positive and negative information in determining the need for a valuation allowance.

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. The company needs to assess the probability that it will not be able to fully realize the benefits of the deferred tax asset in the future.

For example, if a company has a history of generating consistent profits and expects to continue doing so, it may determine that a valuation allowance is not necessary. On the other hand, if a company has experienced losses in recent years or faces uncertainties in its future profitability, it may decide to recognize a valuation allowance to reduce the carrying amount of the deferred tax asset on its balance sheet.

correct answer is option 1. consider all positive and negative information in determining the need for a valuation allowance.