Valuation Allowance for DTAs

Question 1

When should a valuation allowance be placed on a DTA?

Answer 1

When there is less than a 50% chance of realizing the DTA. A VA is reported as a contra account to the extent under 50% realizable

Question 2

In what situations can a VA be needed?

Answer 2

1. ) A history of unused NOLs
2. ) A history of operating losses
3. ) Losses expected in future years
4. ) Very unfavorable contingencies
5. ) Brief carryback or carryforward period I.e., a significant deductible temporary difference may be expected to reverse in a single year. .

Question 3

What sources can be used to present sufficient evidence that a DTA can be realized in the future?

Answer 3

1. ) Expectation of future TI
2. ) TI in prior years within the two-year carryback period for NOLs - i.e., TI of $200 in 05, but loss in 06, can carryback $200 of DT expense
3. ) Future taxable differences
4. ) Tax planing strategies

Question 4

Compute the ending valuation allowance if the total future deductible difference is $4,000, tax rate is 30%, and only $1,000 of future taxable income is assured

Answer 4

$900 (deferred tax asset balance is $1,200, but only $300 is expected to be realized).

Question 5

How is the amount of a valuation allowance determined?

Answer 5

Enough to reduce deferred tax asset to amount that has a better than 50% chance of being realized.

Question 6

What is the classification of the valuation allowance for deferred tax assets?

Answer 6

The classification is contra deferred tax asset.

Question 7

What does a history of unused net operating losses suggest in relation to a DTA?

Answer 7

Evidence suggesting that the deferred tax asset will not be realized.

Question 8

What is the most popular source used to present sufficient evidence that a DTA can be realized in the future?

Answer 8

Expectation of future TI

Question 9

How is a VA reported in the Balance Sheet?

Answer 9

The full deferred Tax Asset and Valuation Allowance are reported. The DTA is reported net in the balance sheet with the footnotes reporting the full asset and VA

Question 10

How are VAs classified?

Answer 10

They follow the related asset

Question 11

What tax rate is used to measure DTA?

Answer 11

The rate is based on source of realization. i.e., when the DTA is expected to be realized