medium · Financial Accounting accounting-cycle-financial-statements
An entity has a $100,000 DTA. It currently has a $100,000 valuation allowance against it.
If the entity's profitability improves and management decides the DTA is now 'more likely than not' to be realized, what is the impact on the financial statements?
- A $100,000 gain is recorded directly in Other Comprehensive Income (OCI) rather than the income statement.
- A $100,000 income tax benefit is recognized in the income statement, and the DTA net balance increases to $100,000.
- No income statement impact occurs at all; the valuation allowance is simply removed quietly from the balance sheet.
- The $100,000 allowance release is recorded as a direct credit to Retained Earnings, bypassing the income statement entirely.
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