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Some companies that historically have been profitable are now seeing losses in particular quarters or years. Jennifer Spang, a partner in tax accounting for PricewaterhouseCoopers, stresses that there’s nothing new in the accounting rules for deferred tax assets, “but the current economy is making that evaluation particularly challenging. “The biggest thing that is explicit in the rules: If a company has cumulative losses in recent years, then it would be unlikely to not have a valuation allowance in that situation,” he said. According to Jeff Sanders, a partner at Texas-based auditing firm Weaver and Tidwell, auditors are encouraging companies to take a careful look at their deferred tax assets and to determine whether a valuation allowance is warranted. “The macroeconomic pressure on deferred tax assets is forcing companies to reevaluate the likely usefulness of these assets on the balance sheet.”Īccounting guidance on deferred tax assets and valuation allowances generally is found in the Accounting Standards Codification under Topic 740, Income Taxes (existing in past life as Financial Accounting Standard No. If you have deferred tax assets, you have to look at whether there is a need for a valuation allowance.” “There are many reasons a company could have a deferred tax asset. “Almost every company is going to be affected,” says Jose Lamela, managing director with consulting firm Alvarez & Marsal Taxand. A writedown in loan values would prompt a writedown in deferred tax assets (also called a valuation allowance), which wrings value out of the balance sheet and becomes a charge to the income statement.īut the deferred tax asset problem goes well beyond the battered banking sector. The problem is acute for financial institutions that are now fiercely defending value in toxic loan portfolios, Martin says.
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“These deferred tax assets don’t last forever.” “The Big 4 firms generally say if you have a certain level of losses historically, that casts doubt on whether you will be able to realize that asset in the future,” Martin says. Deferred tax assets are realized when companies record taxable income, and they generally expire after a few years depending on the specific tax rules that gave rise to the asset in the first place.
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The catch? That expectation of future earnings. While you’re waiting you hang it up on your balance sheet as an asset until you can use it later.” “Maybe you can realize a tax benefit now for book purposes, but for tax purposes you have to wait. “A deferred tax asset is a timing difference,” Martin says. Such assets arise because of differences between tax rules and accounting rules. Its represents future deductions or net operating losses that can be carried forward to offset future earnings. “This is definitely a big problem for companies right now,” says Rick Martin, vice president at Pluris Valuation Advisors.Ī deferred tax asset is an asset on a company’s balance sheet based on the company’s expectation of a tax benefit to be claimed in the future. With losses mounting at many companies and forecasts offering scant hope for recovery, auditors are starting to ask hard questions about the deferred tax assets companies are reporting.