Explain when a firm may recognize a deferred tax asset under SFAS No. 109. How should deferred tax assets that are not expected to be realized be accounted for?
What will be an ideal response?
ANSWER:
SFAS No. 109 allows deferred tax assets to be carried back and to be carried forward against deferred tax liabilities of future years. In addition, it allows recognition of deferred tax assets if realization is “more likely than not,” which means a probability of more than 50 percent. If, from the best available evidence, all of a deferred tax asset cannot be realized, a valuation allowance for the amount that is not expected to be realized should be set up.
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