Final answer:
The statement is false.
Step-by-step explanation:
A deferred tax asset valuation allowance is an accounting estimate that a company uses to reduce the value of its deferred tax assets to the amount that is more likely than not to be realized. While it involves management judgment, it is guided by accounting standards and principles which require that companies must assess whether it is probable that all or a portion of the deferred tax asset will be realized. When future realization is not likely, a valuation allowance must be established, essentially reducing the deferred tax asset balance on the balance sheet.
The judgment involved requires careful consideration of all available evidence, both positive and negative. Some of the factors that management should evaluate include past earnings history, future earnings projections, tax planning strategies, and the duration of statutory carryforward periods. For example, if a company has been experiencing consistent losses with limited prospects of future taxable income, it might be prudent for management to establish a full or partial valuation allowance against its deferred tax assets.
Therefore, the claim that the valuation allowance is entirely up to managerial judgment is false. It involves the application of accounting principles, which are subject to audit and regulatory review, limiting the extent of subjective judgment that management can apply.