{"id":4255,"date":"2019-03-07T08:13:54","date_gmt":"2019-03-07T08:13:54","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=4255"},"modified":"2026-03-27T15:09:06","modified_gmt":"2026-03-27T15:09:06","slug":"valuation-allowance-deferred-tax-assets","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/","title":{"rendered":"Valuation Allowance for Deferred Tax Assets"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Income Taxes (2024\/2025 CFA\u00ae Level I Exam \u2013 FRA \u2013 Module 9)\",\n  \"description\": \"Prep Packages for the CFA\u00ae Program offered by AnalystPrep (study notes, video lessons, question bank, mock exams, and much more). This lesson covers Topic 3 \u2013 Financial Statement Analysis, Module 9 \u2013 Income Taxes. Learning Outcome Statements (LOS): Describe differences between accounting profit and taxable income and define key tax terms. Explain creation and treatment of deferred tax assets and liabilities. Calculate tax base, income tax expense, taxes payable, deferred tax items, and adjustments from tax rate changes. Evaluate effects of tax rate changes, distinguish temporary vs permanent differences, explain valuation allowances, analyze deferred tax disclosures, and compare IFRS vs US GAAP income tax accounting.\",\n  \"uploadDate\": \"2022-04-27\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/ZdGeNqOn7iA\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=ZdGeNqOn7iA\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/ZdGeNqOn7iA\",\n  \"duration\": \"PT36M15S\"\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"How does uncertainty about recoverability of deferred tax assets affect companies reporting under IFRS versus US GAAP?\",\n    \"text\": \"Amir Co. reports under IFRS whereas Hamed Ltd. reports under US GAAP. Both companies reported tax assets on their financial statements. If the recoverability of the tax assets of both companies becomes susceptible, how would that affect their financial statements?\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"Hamed Ltd. would report a valuation allowance, while Amir Co. would decrease the deferred tax asset by the susceptible amount. Under US GAAP, a valuation allowance is required when recovery is uncertain, whereas IFRS requires a direct reduction of the deferred tax asset.\"\n    }\n  }\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"What is the effect of creating a valuation allowance on a deferred tax asset?\",\n    \"text\": \"The creation of a valuation allowance: Always reduces the deferred tax asset during the period in which the allowance is established, always increases the deferred tax asset, or may either increase or reduce the deferred tax asset.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"Creating a valuation allowance always reduces the deferred tax asset during the period in which the allowance is established. This occurs when it is unlikely that some or all of the deferred tax asset will be realized.\"\n    }\n  }\n}\n<\/script>\n\n\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/ZdGeNqOn7iA\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>US GAAP recognizes a deferred tax asset in full but reduces it by a valuation allowance if it is very likely that some or the entire deferred tax asset will not be realized.<\/p>\n<h2><strong>Valuation Allowance<\/strong><\/h2>\n<p>Deferred tax assets should be assessed on every balance sheet date. If there is doubt that the deferral will be recovered, then the carrying amount should be reduced to the expected recoverable amount. The reduction may, however, be reversed if the situation changes and projects the possibility of the recovery of the deferral in future.<\/p>\n<p>Deferred tax assets are reduced, under US GAAP, by creating a valuation allowance. The creation of the valuation allowance reduces the deferred tax asset and income in the period in which the allowance is established.<\/p>\n<p>If circumstances change to the extent that a deferred tax asset valuation allowance may be reduced, the reversal will increase the deferred tax asset and operating income.<\/p>\n<blockquote>\n<h3><strong>Question 1<\/strong><\/h3>\n<p>The creation of a valuation allowance:<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">Always reduces the deferred tax asset during the period in which the allowance is established.<\/li>\n<li data-tadv-p=\"keep\">Always increases the deferred tax asset during the period in which the allowance is established.<\/li>\n<li data-tadv-p=\"keep\">May reduce or increase the deferred tax asset during the period in which the allowance is established.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>A valuation allowance will reduce the deferred tax asset during the period in which the allowance is established if it is very likely that some or the entire deferred tax asset will not be realized.<\/p>\n<h3><strong>Question 2<\/strong><\/h3>\n<p>Amir Co. reports under IFRS whereas Hamed Ltd. reports under US GAAP. Both companies reported tax assets on their financial statements. If the recoverability of the tax assets of both companies becomes susceptible, how would that affect their financial statements?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">Both companies would report a valuation allowance.<\/li>\n<li data-tadv-p=\"keep\">Amir Co. would report a valuation allowance and Hamed Ltd. would decrease the asset by the susceptible amount.<\/li>\n<li data-tadv-p=\"keep\">Hamed Ltd. would report a valuation allowance and Amir Co. would decrease the asset by the susceptible amount.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>C<\/strong>.<\/p>\n<p>Regarding the recoverability of deferred tax assets, US GAAP requires the creation of a valuation allowance while IFRS requires the devaluation of the deferred tax asset.<\/p>\n<\/blockquote>\n\n\n<div style=\"text-align: center; margin: 40px 0 10px;\">\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"\n     style=\"display: inline-flex; align-items: center; justify-content: center;\n     padding: 10px 24px; border-radius: 999px;\n     font-size: 15px; font-weight: 600;\n     background-color: #4a72c9; color: #ffffff;\n     text-decoration: none; line-height: 1.2; white-space: nowrap;\">\n    Start Free Trial \u2192\n  <\/a>\n\n  <p style=\"margin: 14px auto 0; max-width: 680px; font-size: 15px; line-height: 1.6; color: #333333;\">\n    Build confidence in valuation allowances, deferred tax asset realizability, and tax-related CFA Level I questions with structured practice and study support.\n  <\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>US GAAP recognizes a deferred tax asset in full but reduces it by a valuation allowance if it is very likely that some or the entire deferred tax asset will not be realized. Valuation Allowance Deferred tax assets should be&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5],"tags":[],"class_list":["post-4255","post","type-post","status-publish","format-standard","hentry","category-financial-reporting-and-analysis","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Valuation Allowance for Deferred Tax Assets | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Learn how valuation allowances impact deferred tax assets and why firms assess recoverability at the end of each fiscal year.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Valuation Allowance for Deferred Tax Assets | CFA Level 1\" \/>\n<meta property=\"og:description\" content=\"Learn how valuation allowances impact deferred tax assets and why firms assess recoverability at the end of each fiscal year.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/\" \/>\n<meta property=\"og:site_name\" content=\"AnalystPrep | CFA\u00ae Exam Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2019-03-07T08:13:54+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2026-03-27T15:09:06+00:00\" \/>\n<meta name=\"author\" content=\"Simon\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Simon\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"1 minute\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/\"},\"author\":{\"name\":\"Simon\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687\"},\"headline\":\"Valuation Allowance for Deferred Tax Assets\",\"datePublished\":\"2019-03-07T08:13:54+00:00\",\"dateModified\":\"2026-03-27T15:09:06+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/\"},\"wordCount\":393,\"articleSection\":[\"Financial Reporting and Analysis\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/\",\"name\":\"Valuation Allowance for Deferred Tax Assets | CFA Level 1\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\"},\"datePublished\":\"2019-03-07T08:13:54+00:00\",\"dateModified\":\"2026-03-27T15:09:06+00:00\",\"author\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687\"},\"description\":\"Learn how valuation allowances impact deferred tax assets and why firms assess recoverability at the end of each fiscal year.\",\"breadcrumb\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Valuation Allowance for Deferred Tax Assets\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\",\"name\":\"AnalystPrep | CFA\u00ae Exam Study Notes\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687\",\"name\":\"Simon\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/analystprep-150x150.png\",\"contentUrl\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/analystprep-150x150.png\",\"caption\":\"Simon\"},\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/analystprep\/\"}]}<\/script>\n<meta property=\"og:video\" content=\"https:\/\/www.youtube.com\/embed\/ZdGeNqOn7iA\" \/>\n<meta property=\"og:video:type\" content=\"text\/html\" \/>\n<meta property=\"og:video:duration\" content=\"2176\" \/>\n<meta property=\"og:video:width\" content=\"480\" \/>\n<meta property=\"og:video:height\" content=\"270\" \/>\n<meta property=\"ya:ovs:adult\" content=\"false\" \/>\n<meta property=\"ya:ovs:upload_date\" content=\"2019-03-07T08:13:54+00:00\" \/>\n<meta property=\"ya:ovs:allow_embed\" content=\"true\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Valuation Allowance for Deferred Tax Assets | CFA Level 1","description":"Learn how valuation allowances impact deferred tax assets and why firms assess recoverability at the end of each fiscal year.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/","og_locale":"en_US","og_type":"article","og_title":"Valuation Allowance for Deferred Tax Assets | CFA Level 1","og_description":"Learn how valuation allowances impact deferred tax assets and why firms assess recoverability at the end of each fiscal year.","og_url":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/","og_site_name":"AnalystPrep | CFA\u00ae Exam Study Notes","article_published_time":"2019-03-07T08:13:54+00:00","article_modified_time":"2026-03-27T15:09:06+00:00","author":"Simon","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Simon","Est. reading time":"1 minute"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/"},"author":{"name":"Simon","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687"},"headline":"Valuation Allowance for Deferred Tax Assets","datePublished":"2019-03-07T08:13:54+00:00","dateModified":"2026-03-27T15:09:06+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/"},"wordCount":393,"articleSection":["Financial Reporting and Analysis"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/","name":"Valuation Allowance for Deferred Tax Assets | CFA Level 1","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website"},"datePublished":"2019-03-07T08:13:54+00:00","dateModified":"2026-03-27T15:09:06+00:00","author":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687"},"description":"Learn how valuation allowances impact deferred tax assets and why firms assess recoverability at the end of each fiscal year.","breadcrumb":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/valuation-allowance-deferred-tax-assets\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/cfa-level-1-exam\/"},{"@type":"ListItem","position":2,"name":"Valuation Allowance for Deferred Tax Assets"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/","name":"AnalystPrep | CFA\u00ae Exam Study Notes","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687","name":"Simon","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/analystprep-150x150.png","contentUrl":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/analystprep-150x150.png","caption":"Simon"},"url":"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/analystprep\/"}]},"og_video":"https:\/\/www.youtube.com\/embed\/ZdGeNqOn7iA","og_video_type":"text\/html","og_video_duration":"2176","og_video_width":"480","og_video_height":"270","ya_ovs_adult":"false","ya_ovs_upload_date":"2019-03-07T08:13:54+00:00","ya_ovs_allow_embed":"true"},"_links":{"self":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/4255","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/comments?post=4255"}],"version-history":[{"count":28,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/4255\/revisions"}],"predecessor-version":[{"id":60057,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/4255\/revisions\/60057"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/media?parent=4255"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/categories?post=4255"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/tags?post=4255"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}