I just want to verify some things on this subject. When a valuation allowance is increased as a contra-account effect on the existing DTA, does the following happen: Valuation allowance charge on DTA is recorded as an expense in the period Assets reduced by valuation allowance charge on DTA. So an INCREASE in valuation allowance is an increase in reduction in DTA? In Equity, retained earnings is reduced to balance with the reduction in assets? A postive change in valuation allowance means a larger writedown of DTA, meaning a positive change in expenses, reducing net income?
Yea, the asset, equity, and DTA are correct but I am a little fuzzy on the expense?
I’m reading that there IS an effect on net income, so I’m wondering if that is a result of an expense recognized for the period where there is an increase in valuation allowance.
Thats tough, but there has to be an effect on the income statement if retained earnings takes a hit from the valuation allowance. Since accumulated depreciation is also a contra account and depreciation is an expense recognized on the income statement, I would assume the valuation allowance for DTA is somewhat similar… but thats a complete guess.
yes, valuation allowance is a contra account for the DTA, as chasinggoats above has mentioned.