Documentation of Valuation of Deferred Tax Assets

Eric,

I assume you're talking about GAAP reporting. In large part this will be "what the auditors say is good enough." Good enough typically means being able to demonstrate that you *can* earn sufficient amounts to utilize the asset; that your plans explicitly exclude any actions that might compromise the asset; that your plans explicitly include activities that will utilize the asset.

A very consistent earnings history (think GE) is a good place to start.

Earnings volatility, cyclical market pressures, intent to change operations (like purchase a competitor), etc will all compromise the asset.

Once you get to the point of needing an allowance, the question is "how much"? Personally, if you're not public, I just write the whole thing down as it isn't worth the time structuring and discussing the allocation model.* However, if you want to do it, to the extent that you can show earnings stability, you use that.

Note that there seems to be a bit of a gray area here. If you say you are going to use the tax asset because you're going to take certain actions, and you don't, that you signed off in the report that you were going to take those actions seems to tie your hands a little (imho).

*While telling the management team how you've shown it, so they understand that the asset really is still there.

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