Determining the Expected Credit Loss (ECL) for deferred tax assets (DTAs) under US GAAP involves assessing the probability that the entity will realize the future tax benefits associated with those assets. According to ASC 740-10-50-15, 'Income Taxes - Overall (Subtopic 740-10)', when evaluating the realizability of DTAs, an entity should consider all available positive and negative evidence, both quantitative and qualitative.
Key factors to consider in determining ECL for DTAs include:
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Future taxable income: The entity must project whether it will generate sufficient taxable income in the appropriate periods to utilize the DTAs.
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Tax planning strategies: The entity's ability to carry forward losses or credits to offset future taxable income can impact the ECL calculation.
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Economic conditions: Changes in the economic environment may affect the entity's ability to generate taxable income.
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Statutory changes: Changes in tax laws or regulations could limit the utilization of DTAs.
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History of profitability: A history of recurring losses may indicate a higher ECL.
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Duration of the deferral period: Longer deferral periods may increase the uncertainty around realizing the tax benefit.
The ECL on DTAs is typically recognized as a valuation allowance if, based on the weight of available evidence, it is more likely than not (a probability threshold of greater than 50%) that some portion or all of the DTAs will not be realized. The valuation allowance is increased or decreased as necessary to reflect changes in circumstances that affect the realizability of the DTAs.
Remember, the ECL approach for DTAs is distinct from the ECL calculation for financial instruments, which focuses on estimating credit losses over the life of those instruments.
