Deferred Tax Asset Valuation Allowance

This video discusses the Deferred Tax Asset Valuation Allowance in Financial Accounting.  Deferred Tax Assets provide future tax savings by reducing income tax payable in the future.  A firm cannot realize these tax savings, however, if the firm does not generate taxable income in the future.  Thus, if management believes it is more likely than not that some of the tax benefits provided by a deferred tax asset will not be realized, the firm must set up a valuation allowance as a contra-account to offset the value of the deferred tax asset on the balance sheet.  If at some point in the future the firm does generate taxable income, it can reduce the valuation allowance.  Management has considerable discretion in making decisions regarding the likelihood that the benefits from a deferred tax asset will be realized.  In some cases, management may exploit the deferred tax asset valuation allowance for purposes of earnings management.

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