Valuation Allowance for Deferred Tax Assets

A deferred tax asset is created due to a temporary difference between accounting profits and taxable income and the company expects this difference to reverse in the future with sufficient future taxable income. However, if there is not sufficient taxable income in the future, the DTA cannot be reversed.

For this reason, the company is required to assess every year, the likelihood that there will be sufficient future taxable income which will be used to recover the tax asset. Under US GAAP, if there is a >50% probability that DTA will not be realized, then the company is required to create a valuation allowance to reduce the deferred tax asset.