Valuation allowance question

CFA Level I FRA
#1

I had this question on my schweser qbank and I did not get it why the answer is not C? can someone explain it to me please?

Which of the following situations will most likely require a company to record a valuation allowance on its balance sheet?

A) A firm is unlikely to have future taxable income that would enable it to take advantage of deferred tax assets.

B) To report depreciation, a firm uses the double-declining balance method for tax purposes and the straight-line method for financial reporting purposes.

C) A firm has differences between taxable and pretax income that are never expected to reverse.

Correct answer: A

#2

Valuation allowances are created when firm are unlikely to have taxable income against which Deferred tax assets can be applied. This is the definition of valuation allowances.

C is the definition of a permanent differences between pretax income and taxable income. Permanent differences do not give rise to deferred taxes. As such, no valuation allowances would be required.

1 Like