G Describe the valuation allowance for fferred tax assets, when it is required and what impact it has on financial statements

Question 1

Valuation allowance

Answer 1

A contra account that reduces the net balance sheet value of the DTA. Increasing the valuation allowance will decrease the net balance sheet DTA, increasing income tax expense and decreasing NI.

An inc. in the val allowance will dec. earnings, management can manipulate earnings by changing the valuation allowance.

Whenever a comp reports substantial deferred tax assets, an analyst should review the company’s financial performance to determine the likelihood that those assets will be realized. Analysts should also scrutinize changes in the valuation allowance to determine whether those changers are economically justified.

*A val. allow. acct is only used for deferred tax assets. GAAP =- def. tax A’s and DTL’s appear separately on the BS and they are not typically netted.