I was doing the following VA question and didn’t understand the solution:
From 2015 to 2017, Valuation allowance went from (839,000) in 2015, to (844,000) in 2016 and finally (124,000) in 2017.
The question is: What does the change in valuation allowance for deferred tax assets indicate over the period of three years from 2015-2017?
and the solution is the following:
“Over the given time period, changes in the valuation allowance reduced aggregate income taxes by $1,828,000. The reductions to the valuation allowance were a result of the company being more likely to earn sufficient taxable income to offset the deferred tax assets i.e., the future earnings are expected to increase.”
I don’t get why they say that future earnings will increase, as the VA increased from 2015 to 2017, and increase of VA should decrease future earnings and not increase them? Can anyone explain the logic behind?