Page 48 - FINAL CFA I SLIDES JUNE 2019 DAY 8
P. 48
Session Unit 8:
30. Income Taxes
LOS 30.g: Describe the valuation allowance for deferred tax assets—when it is required and what
effect it has on financial statements., p.256
The valuation allowance per US GAAP, is a contra account (just like accumulated depreciation) that
is used to reduce the net balance sheet value of the DTA ; when it is assessed at each balance sheet
date and deemed to have a more than 50% probability that some or all will not realised
(insufficient taxable income to recover the tax asset).
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An increase in the valuation allowance will decrease earnings
A decrease in the valuation allowance will increase earnings
CFA must watch out!
Whenever a company reports substantial deferred tax assets, an analyst should review the
company’s financial performance to determine the likelihood that those assets will be realized.
Analysts should also scrutinize changes in the valuation allowance to determine whether those
changes are economically justified.
