valuation allowance represent, liability, following, valuation, sufficient

rosewhite

a decrease in valuation allowance would be indicative of which one of the following:

A deferred tax liability were reduced in the previous year.

B Expectations of future earning power has increased

C expectation of future earning power has decreased















ans: B

the valuation allowance is taken against DTA to represent uncertainty that future taxable income will be sufficient to fully utilize the assets. by decreasing the allowance, there is a greater likelihood that future earnings will be offset by DTA

i dont get it, i thought valuation allowance increase to offset DTA when there is uncertainty about future income. the higher the VA, the less uncertain the future income is to utilise DTA. the answer suggest the opposite.

waldziuchna

this is Q15 on V3 page 508, by the way, i agree with you sd, but i dont get the answer.

LokiDog2

The higher the valuation allowance, the more questions there are regarding the company's ability to realize the DTA in the future. Therefore, if you decrease the DTA then it must mean that the company's earnings outlook has become clearer and there is less risk to the DTA. You get this by seeing future earnings power increasing