FRA
Income Taxes
Presentation and Disclosure
The example states " The disclosure in [Exhibit 4] shows that the increase in the valuation allowance increased the income tax provision as reported on the income statement by $64 million in 2017.
How is it increasing the Provision ? The provision is bracketed and the valuation allowance isn’t.
S federal income tax (provision) benefit at statutory rate *$(1,819)
Change in valuation allowance *64
How is this considered an increase ?
Hi,
You could post a screenshot or photo of the question to enable better understanding of your question.
But valuation allowance is a reserve (like a contra account) used to offset a deferred tax asset, based on an entity’s opinion that it is likely that it may not generate sufficient profit to utilise deferred the tax asset. So, when the valuation allowance is increased, deferred tax asset reduces, and the income tax provision will increase.
Consider this: Tax expense = Tax payable + change in deferred tax liabilities - change in deferred tax asset
So if the deferred tax asset reduces because of the increase in the valuation allowance, then the income tax asset will increase.
An example:
Tax expense = 200 + 6 - 5 = 201
if DTA reduces by 10 due to an increase in valuation allowance,
Tax expense = 200 + 6 - (-10) = 216
I hope you understand this.