Question

Adams Corporation has total deferred tax assets of $3,000,000 at year-end. Management is assessing whether a valuation allowance must be recorded against some or all of the deferred tax assets. What level of assurance must management have, based on the weight of available evidence, that some or all of the deferred tax assets will not be realized before a valuation allowance is required?

Answer 1

The level of assurance that the management must have in this case is 'more likely than not'.

This is because a valuation allowance operates as a “contra account” to the deferred tax assets on the balance sheet. If a company determines that it is more likely than not (a likelihood greater than 50%) that some portion or all of the deferred tax assets will not be realized in a future period (that is, reduce future taxable income or future tax liability), the company must offset the deferred tax assets with a valuation allowance to reflect the amount it does not expect to realize in the future.

answered by: anonymous