Accounting for income taxes: Valuation allowance

This whitepaper is the fourth in a series of whitepapers to be used a resource in understanding and analyzing the accounting for income taxes under FASB Accounting Standards Codification (ASC) 740, “Income Taxes”. This whitepaper addresses the realizability or recoverability of deferred tax assets. Deferred tax assets must be evaluated for recoverability which may require a valuation allowance to be recorded to reduce the deferred tax asset to the amount that is expected to be realized. The realization of deferred tax assets would be evaluated using the more-likely-than-not standard, i.e. a valuation allowance would be recognized if it is more likely than not that some or all of the deferred tax asset will not be realized. ASC 740 outlines the sources of taxable income and types of evidence to consider when determining whether to record a valuation allowance. A valuation allowance is an estimate that requires careful consideration of all facts and circumstances. This whitepaper does not address every aspect of accounting for income taxes and should therefore be read in conjunction with the FASB Accounting Standards Codification (ASC) 740 “Income Taxes".