Companies should consider both positive and negative evidence to determine whether it needs to record a valuation allowance to reduce a deferred tax asset.

Question

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Companies must consider both positive and negative evidence when assessing the need for a valuation allowance on a deferred tax asset. Positive evidence includes past profits, future income projections, and taxable income expectations, while negative evidence includes historical losses and significant events indicating uncertainty in realizing the deferred tax asset's benefits. Companies must weigh both types of evidence to make an accurate assessment and record a valuation allowance accordingly.

Companies Should Consider Both Positive and Negative Evidence to Determine