5.4 Consideration of Future Events When Assessing the Need for a Valuation Allowance
In general, entities should consider all available information about
future events when determining whether a valuation allowance is needed for DTAs. In
assessing information that is obtained after the balance sheet date but before the
financial statements are issued or are available to be issued, entities must exercise
professional judgment (see ASC 855). See Section 5.3.2.2 for further discussion of the
effect of nonrecurring items on estimates of future income.
The following are future events that entities should not consider or anticipate when
assessing the realizability of DTAs:
- Changes in tax laws or rates (see ASC 740-10-35-4).
- Changes in tax status (see ASC 740-10-25-32 and 25-33).
- Expected business combinations.
- Expected initial public offerings (IPOs).
- Events that are inconsistent with financial reporting assertions as of the balance sheet date. For example, anticipating sales of HTM securities would be inconsistent with management’s intent and with the classification of such securities. Similarly, entities should not anticipate the sale of indefinite-lived intangible assets that are not classified as held for sale as of the reporting date, because doing so would be inconsistent with management’s assessment of the useful life of these assets.
- Events that depend on future market conditions or that are otherwise not within the entity’s control. For example, an entity should not anticipate income associated with forgiveness of indebtedness to reduce an otherwise required valuation allowance.