CFA论坛 - Powered by Discuz! Board

LOS g: Discuss the valuation allowance for deferred tax assets—when it is required and what impact it has on financial statements.

Which of the following situations will most likely require a company to record a valuation allowance on its balance sheet?

A)	A firm is unlikely to have future taxable income that would enable it to take advantage of deferred tax assets.

B)	To report depreciation, a firm uses the double-declining balance method for tax purposes and the straight-line method for financial reporting purposes.

C)	A firm has differences between taxable and pretax income that are never expected to reverse.

A valuation allowance is a contra account (offset) against deferred tax assets that reflects the likelihood that the deferred tax assets will never be realized. If a firm is unlikely to have future taxable income, it would be unlikely to ever use its deferred tax assets, and therefore must record a valuation allowance.

Which of the following statements best justifies analyst scrutiny of valuation allowances?

A)	If differences in taxable and pretax incomes are never expected to reverse, a company’s equity may be understated.

B)	Increases in valuation allowances may be a signal that management expects earnings to improve in the future.

C)	Changes in valuation allowances can be used to manage reported net income.

A valuation allowance is a contra account (offset) against deferred tax assets that reflects the likelihood that the deferred tax assets will never be realized. Changes in the valuation allowance have a direct impact on reported income. Because management has discretion with regard to the amount and timing of a valuation allowance, changes in the valuation allowance give management significant opportunity to manage earnings.

Which of the following statements best describes the impact of a valuation allowance on the financial statements? A valuation allowance:

A)	reduces reported income, increases liabilities, and reduces equity.

B)	increases reported income, reduces assets, and reduces equity.

C)	reduces reported income, reduces assets, and reduces equity.

A valuation allowance is a contra account (offset) against deferred tax assets that reflects the likelihood that the deferred tax assets will never be realized. The establishment of a valuation allowance reduces reported income, offsets (reduces) assets, and reduces equity.