Final answer:
The income tax benefit of NOL carrybacks is typically recognized immediately due to their application to prior tax periods, while NOL carryforwards are recognized upon assessment of future taxable income sufficiency.
Step-by-step explanation:
The income tax benefit of both a Net Operating Loss (NOL) carryback and an NOL carryforward is recognized for accounting purposes when it is probable that sufficient taxable income will be available against which the NOLs can be utilized.
According to the accounting standards, a deferred tax asset is recognized to reflect the potential benefit of the NOLs. The valuation of this asset is based on the likelihood that the company will generate enough taxable income in the future, taking into consideration any relevant restrictions or limitations.
For an NOL carryback, the benefit is usually recognized immediately because the NOL can be applied to a prior period that usually has already been taxed, resulting in a refund of taxes paid.
For an NOL carryforward, companies must assess the likelihood that they will have enough taxable income in the future to use the NOL before it expires. This involves looking at factors such as future profitability, tax planning strategies, and any restrictions on NOL utilization.