BDO Knows: ASC 740 - August 2014
Deferred tax assets (“DTAs”) are required to be assessed for recoverability or realization (i.e., whether or not they expect to reduce or save cash tax outlays in future periods and/or carryback periods). To be recognized, the likelihood that DTAs will be realizable must exceed 50% based on weighing all available evidence. DTAs are reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. The need for a valuation allowance is assessed based on the gross available DTAs. In making this assessment, a company should consider the existence of sufficient taxable income (of the appropriate character, i.e., ordinary vs. capital gain) from four possible sources: future reversals of existing taxable temporary differences (“TTDs”), future taxable income exclusive of reversing temporary differences (income forecast), taxable income in carryback years if carryback is permitted, and tax planning strategies.1 As explained in this Q&A, the reversal of TTDs related to indefinite-lived assets cannot (in most cases) be determined or scheduled, thereby precluding them from being considered as one of the four permissible sources of income for valuation allowance purposes.