The Determinants of the Deferred Tax Allowance Account Under SFAS No. 109.

Abstract In this study, we examine empirically the association between the recognized deferred tax asset valuation allowance and certain variables put forth as sources of evidence in the FASB's (1992) Statement of Financial Accounting Standard (SFAS) No. 109. Although several papers have discussed theoretically how to account for and audit the deferred tax asset allowance account, there is limited descriptive or empirical evidence that demonstrates how firms are actually applying the standard. While this paper does not provide a definitive answer, it does provide an important initial step in learning how companies apply the SFAS No. 109 guidelines. By examining the association between publicly available proxies and the valuation allowance, we find evidence that certain variables consistent with SFAS No. 109 examples are highly associated with cross-sectional differences in the percent of deferred tax assets that are taken as an allowance. Auditors can use these results to focus on specific factors to aid their search and evaluation of areas of evidence in applying SFAS No. 109 guidelines. The determination of the valuation allowance account reflects a trade-off between relevance and objectivity; hence, the results of this study may also highlight specific factors to assist companies in developing their own approach for estimating the valuation allowance account. Finally, this study may be beneficial to researchers in searching for better proxies or methods to evaluate the deferred tax valuation allowance account.