5.1 Introduction
This chapter provides guidance on the amount at which an entity should
measure a tax asset in its financial statements when the recognition criteria for that
asset or liability have been met in accordance with ASC 740. Specifically, this chapter
focuses on how to evaluate DTAs for realizability and when a valuation allowance would
be appropriate. As the complexity of an entity’s legal structure and jurisdictional
footprint increases, so do the challenges related to measuring tax assets and
liabilities. However, the guidance in this chapter applies equally to highly complex
organizations as well as to simple entities that operate in a single jurisdiction.
A valuation allowance may be required to be recorded against DTAs so the financial
statements reflect the amount of the net DTA that is expected to be used in the future
(i.e., realized). Expected realization of DTAs must meet the more-likely-than-not
standard to be recorded in the financial statements without a valuation allowance. The
more-likely-than-not concept is discussed below.