The provision is done, the deferred ending balances are reconciled, and the proper total valuation allowance has been established. But there is one more thing. If you haven’t considered valuation allowance allocation and presentation in classified financial statements in a while it may be time for a refresher, so read on!
The valuation allowance for a particular tax jurisdiction shall be allocated between current and noncurrent deferred tax assets for that tax jurisdiction on a pro rata basis.
For a particular tax-paying component of an entity and within a particular tax jurisdiction, all current deferred tax liabilities and assets shall be offset and presented as a single amount and all noncurrent deferred tax liabilities and assets shall be offset and presented as a single amount. However, an entity shall not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions.
This is a purely mechanical approach based on percentages rather than matching current or noncurrent valuation allowance amounts specifically to the assets to which the valuation allowance relates. The valuation allowance is allocated in proportion to the related current and noncurrent gross deferred tax asset balances before netting the deferred tax asset balances against deferred tax liability balances (e.g., if 25% of the total gross deferred tax asset balance in a jurisdiction is classified as current, then 25% of the valuation allowance in that jurisdiction likewise would be classified as current).
This can produce an odd result. For example, a valuation allowance may specifically relate to one deferred tax asset, like a noncurrent classified capital loss carryover. However, if that tax-paying component of the entity in a given jurisdiction has half of its gross deferred tax assets classified as current, then half of the valuation allowance is allocated to offset current deferred tax assets – even though no current deferred tax assets are subject to a specific valuation allowance!
After the valuation allowance is split between current and noncurrent, it is applied against the current and noncurrent gross deferred tax assets and combined with the current and noncurrent deferred tax liability, respectively. This is performed separately for each tax-paying component of an entity in each jurisdiction. These amounts are added together across tax-paying components and jurisdictions to determine the classified balance sheet presentation.
An organization can end up with one, two, three, or four deferred tax amounts on its classified balance sheet, depending on the results of this netting process.
Clear as mud? Here’s an example:
Given the mechanics, different facts can result in computational nuances. Accordingly, it is important to review the results of the allocation in your tax provision software or Excel spreadsheets, because you may need to make adjustments to achieve the proper balance sheet presentation.