valuation allowance (deferred tax assets)

prepping for my CFA lv 1 exam now and have a question regarding the valuation allowance..

"Would an increase in valuation allowance signal the company's expectations of a decreased future earnings power or increased future earnings power?" -- please help explain as well... :)

Thanks!

3 Comments
 

An allowance account is a contra-account to an asset which reduces that asset. So therefore an increase in the allowance reflects a decreased expectation in the company's future earnings power. Similar to if "allowance for doubtful accounts" was increased, meaning that the company expects it will be able to collect less (decrease) from its outstanding receivables.

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