5.5 Reduction of a Valuation Allowance When Negative Evidence Is No Longer Present
When an entity concludes that negative evidence (as discussed in ASC 740-10-30-21) exists
and that realization of all or a portion of its DTA as of that date is not more likely
than not, the entity would recognize a valuation allowance to reduce its DTA to an
amount that is more likely than not to be realized. However, circumstances may change
over time such that in a subsequent year, the negative evidence discussed in ASC
740-10-30-21 is no longer present.
If an entity has returned to profitability for a sustained period, the
entity should assume, in the absence of evidence to the contrary, that favorable
operations or conditions will continue in the future. Further, as discussed in Section 5.3.2.2.1, unless the
facts and circumstances dictate otherwise, an entity should not limit the estimate of
future income to (1) a specific period (e.g., the period over which it measures
cumulative losses in recent periods) or (2) general uncertainties. For example, it would
be inappropriate to project taxable income for only three years and assume that taxable
income beyond three years would be zero solely on the basis of the uncertainty in
projecting taxable income beyond three years (such a projection would be particularly
inappropriate if income is projected in connection with other financial statement
assertions, such as those about impairment tests). Therefore, the valuation allowance
provided in prior years for which negative evidence was present should be eliminated in
the period in which the negative evidence ceases to exist.