Emblam Incorporated is a biotechnology firm, engaging in research and development (R&D). During 20X1–20X5, its first five years, it engaged in heavy R&D activities without having yet secured any customers. The product was first sold in 20X6 to several small customers, after the product launched near the end of the fiscal year, resulting in a small profit.
The graph below shows Emblam’s historical earnings (losses) and taxable income (losses) against the historical and projected (for 20X7–20X9) annual industry growth rates. Beyond the forecast period, the long-term industry growth rate is expected to be 4%. Accounting and taxable income for 20X7–20X9 are projected.

Even though the industry is strong, Emblam Incorporated has never recorded a deferred tax asset related to its losses given the uncertainty of the company's future. Now that it has launched its product, it is rethinking this.

Required:
Discuss whether in 20X6 Emblam Incorporated should recognize a deferred tax asset related to the losses. Emblam has secured customers representing 10% market share for the upcoming year.

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Dollars 400,000 200,000 0 -200,000 -400,000 -600,000 -800,000 -1,000,000 20X1 20X2 20X3 20X4 20X5 Year 20X6 20X7 20X8 20X9 Accounting income (loss) Taxable income (loss) Industry annual growth rate Emblam Incorporated Accounting and Taxable Income versus Industry Growth Rate 16% 14% 12% 10% 8% 6% 4% 2% 0% Annual growth percentage