Step 1: Recognition and Measurement of Deferred Taxes

ASC 740, also known as Accounting for Income Taxes, primarily deals with the recognition and measurement of deferred taxes. Deferred taxes arise from temporary differences between the financial statement carrying amounts of assets and liabilities and their tax bases. The standard requires entities to recognize deferred tax liabilities or assets based on these temporary differences, using enacted tax rates.

Step 2: Valuation Allowance for Deferred Tax Assets

When it's more likely than not that a portion or all of a deferred tax asset will not be realized, ASC 740 requires the establishment of a valuation allowance. This allowance reflects the portion of deferred tax assets that is not expected to be realized through future tax deductions. The assessment of the need for a valuation allowance involves subjective judgment based on available evidence.

Step 3: Accounting for Uncertain Tax Positions

ASC 740 also addresses the accounting for uncertain tax positions. Entities are required to recognize the financial statement benefit of a tax position only when it is more likely than not that the position will be sustained upon examination by tax authorities. This involves a two-step process: recognition of the tax benefit and measurement at the largest amount that is more than 50% likely to be realized.

Objective Type Question:

In Accounting for Income Taxes (ASC 740), what does the establishment of a valuation allowance signify?

A) Recognition of deferred tax liabilities B) Recognition of deferred tax assets C) More likely than not realization of deferred tax assets D) Doubt regarding the realization of deferred tax assets