responding

1) Deferred tax assets on the balance sheet statement arises as a result of overpayment or advance payment of tax and is usually the indifference between taxes payable in income statement and actual taxes paid to the IRA. (ACCA Global, 2020).

The recognition of deferred tax asset happens when company estimates that it is probable that future tax profit will be available against which unused tax losses/credits can be utilised. The realization of deferred tax assets happens if the future deductible amounts under the existing provisions of the tax law, result in future tax losses that can be carried back to recover taxes paid for the current year or prior years within the carry back period.

 

The four necessary sources of taxable income that company evaluates for valuation allowance are:

The future reversals of existing favourable (taxable) temporary differences

The Taxable income of prior carry back year(s)

Expected future taxable income exclusive of reversing temporary difference and carry forwards

Taxable income resulting from prudent tax planning strategies ("Valuation allowance for deferred tax assets – the basics", 2020).

The first two sources mentioned above are objective sources of evaluation and others are subjective sources of evaluation. Objective sources of taxable income generally receive more weight when analysing whether a valuation allowance is necessary ("Valuation allowance for deferred tax assets – the basics", 2020).

Valuation allowance is contra asset account for deferred tax asset and shows when the probability of non-utilization of deferred tax assets is greater than 50% due to unavailability of sufficient future taxable income.

References:

https://www.accaglobal.com, A. (2020). Deferred tax | F7 Financial Reporting | ACCA Qualification | Students | ACCA Global. Retrieved 20 November 2020, from https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/deferred-tax.html#:~:text=Deferred%20tax%20assets%20and%20liabilities,which%20other%20liabilities%20are%20measured.

Valuation allowance for deferred tax assets – the basics. (2020). Retrieved 20 November 2020, from https://www.pwc.com/us/en/cfodirect/accounting-podcast/asc-740-valuation-allowance.html

2) Recognition relates to whether it is likely that the organization has the right to a future tax benefit and if so the organization can record the deferred tax asset on the balance sheet.  However, the realization is the organization expects to have sufficient taxable income or tax liability in the future to absorb the future tax deductions or credits when they are reported on the tax return or before it expires (Spilker, 2020).

 

There are four sources of taxable income a company evaluates in determining if a valuation allowance is necessary is identified under ASC740. The first is future reversals of existing favorable temporary differences, the second is taxable income in prior carryback years, then expected future taxable income exclusive of reversing temporary differences and carry forward, and taxable income that will result from prudent tax planning strategies (Spilker, 2020). The ASC740 goes into depth on each of these potential sources.