The sums of income tax that an entity can recover in the future. These income taxes are typically recorded as assets, and by origin arise from any deductible temporary differences, unused tax losses carried forward, and unused tax credits carried forward. For example, an entity may have a deferred tax asset that reflects a host of future tax benefits (i.e., income tax deductions) that it can claim in relation to retirement benefits (pertaining to its employees). To that end, a valuation allowance would be formed on respective deferred tax assets in order to bring the deferred tax assets closer to the amount that can be realized in the form of taxable income reductions.
In accounting treatment, a net deferred tax asset (net DTA) may be recognized if it is more likely than not (more than 50% probability) that an entity will realize the tax benefit in the future. The valuation allowance (a contra asset) is used to reduce the gross deferred tax asset (gross DTA) amount if it is more likely than not that some or all of the gross amount will not be realized.
Gross deferred tax asset –Â valuation allowance = net deferred tax asset
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