Question

In determining whether to adjust a deferred tax asset, a company should

a. consider all positive and negative information in determining the need for an adjustment.
b. consider only the positive information in determining the need for an adjustment.
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 needs to consider all relevant information, both positive and negative, to accurately adjust a deferred tax asset, ensuring future profitability and the availability of taxable income to utilize the asset.

Step-by-step explanation:

In determining whether to adjust a deferred tax asset, a company should consider all positive and negative information in determining the need for an adjustment. This includes forecasting future profitability, available tax planning strategies, and the results of recent operations. The company must assess whether it is probable that sufficient taxable profit will be available against which the deductible temporary difference can be utilized. An aggressive approach to tax planning or considering only the positive information is not advisable as it may lead to an inaccurate valuation of the deferred tax asset. Moreover, the recognition threshold is not just about assuming an audit; it should be based on the evidence available that supports the recognition of the asset.