CFA Practice Question

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CFA Practice Question

Which of the following events will most likely result in a decrease in a valuation allowance for a deferred tax asset under U.S. GAAP (generally accepted accounting principles)?
A. A reduction in tax rates
B. A decrease in interest rates
C. An increase in the carry forward periods available under the tax law
Explanation: Under U.S. GAAP, deferred tax assets must be assessed at each balance sheet date. If there is any doubt whether the deferral will be recovered, the carrying amount should be reduced to the expected recoverable amount. The asset is reduced by increasing the valuation allowance. Should circumstances change, so that it is more probable that the deferred tax benefits will be recovered, the deferred asset account will be increased (and the valuation allowance decreased).

An increase in the carry forward period for tax losses extends the possibility that benefits will be realized from the deferred tax asset and would likely result in a decrease in the valuation allowance and an increase in the deferred tax asset.

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