Schweser page 279 #19 An analyst is reviewing a company with DTA on its BS. He determined that the firm has had cumulative losses for the last 3 years and a large amount of inventory that can be sold only at sharply reduced pries. What are teh adjustments needed to account for the DTA? B) recognize a valuation allowance to reflect the fact that DTA is unlikely to be realized. Isn’t this incomplete? I thought you need to decrease an offset in equity. can someone confirm?
iregula Wrote: ------------------------------------------------------- > Schweser page 279 #19 > > An analyst is reviewing a company with DTA on its > BS. He determined that the firm has had cumulative > losses for the last 3 years and a large amount of > inventory that can be sold only at sharply reduced > pries. What are teh adjustments needed to account > for the DTA? > > > B) recognize a valuation allowance to reflect the > fact that DTA is unlikely to be realized. > > > Isn’t this incomplete? I thought you need to > decrease an offset in equity. can someone confirm? a valuation allowance decreases net income and flows into equity…thus if you are an analyst looking at YOUR OWN b/s (as the question states) then you would take the allowance in NI and that would decrease equity however, if you are an analyst not with the CO, maybe a sell side analyst then you would adjust the b/s by decreasing DTA and corresponding decrease in equity.
The company has a large DTA, but DTA reverses if the company has some taxable income to show in the long run or is profitable.From the 2 statements given that the company had cumulative losses for the last 3 yrs and the inventory they have can only be sold at a bumper loss price - means that they will contunie to be a loss making company in near future too.So the best bet for an analyst like us is to have a VA that will be the contra account and will represent the DTA that is not going to get revered. So B