Implications of Valuation Allocation

A deferred tax asset is a reduction in future cash outflow (taxes to be paid). But, the asset has value only if the firm expects to pay taxes in the future. Valuation allowance is as a contra-asset account CR (credit) balance on the balance sheet to reduce the value of their deferred tax assets.
Increasing the valuation allowance increases deferred income tax expense; decreasing the allowance does the opposite. Changes in the allowance affect income tax expense.

Analysts need to do:
· scrutinize the changes in the allowance may be manipulated by management.