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A friend of yours is working toward a master of business administration (MBA) degree. He e-mails you the following note: Hey! How are things going?

A friend of yours is working toward a master of business administration (MBA) degree. He e-mails you the following note:

"Hey! How are things going? I need your help! We are studying income taxes in my Financial Accounting class and just finished talking about deferred taxes. I think the professor said something about adjusting the value of deferred taxes when it's an asset but not when it's a liability. When I looked at my homework problem, the balance sheet shows both a deferred tax asset and a deferred tax liability. Shouldn't it be one or the other? And why would one need the value adjusted for one, but not the other? Help!"

You want to help your friend, but you remember having some questions yourself:

  • Analyze why FASB requires companies to report both deferred tax assets and deferred tax liabilities instead of netting them.
  • Examine why the FASB requires valuation adjustments for deferred tax assets but does not for deferred tax liabilities.

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