5. Recognition and Measurement of Current and Deferred Tax
g. describe the valuation allowance for deferred tax assets - when it is required and what impact it has on financial statements;
h. explain recognition and measurement of current and deferred tax items;
When reassessing deferred tax assets and liabilities on every balance sheet, what is Valuation Allowance?
Deferred tax assets are reduced by a valuation allowance to amounts that are "more likely than not" to be realized, taking into account all available positive and negative evidence about the future.
Are deferred tax liabilities also accounting liabilities? Should the analyst treat them as liabilities as well?
- Yes, technically deferred tax liabilities are also accounting liabilities, because the tax is due in the future.
- However, the analyst should only treat them as a liability if they are likely to be paid, resulting in a cash outflow. If they're not likely to be paid then they should be treated as equity.
If a company has an operating loss with associated tax loss, what are the two options available?
1. They can be carried back and applied to previous years to obtain refunds of taxes paid.
2. They can be carried forward to future periods and recognized as deferred tax assets