During a bankruptcy proceeding, a reporting entity should continue to assess the realizability of its deferred tax assets in accordance with ASC 740. While the need for a valuation allowance is subject to management’s judgment, it would be unusual for a reporting entity in bankruptcy to not have at least a partial valuation allowance related to its deferred tax assets. In assessing the need for a valuation allowance prior to bankruptcy, a reporting entity may have contemplated certain operational and tax planning strategies whose execution was in the control of management. See BLG 2.7.3 for discussion of valuation allowance considerations prior to entering bankruptcy.

Once in bankruptcy, the execution of such strategies may be outside of the control of management since typically the Court will have the final approval on any strategic initiatives. Management should assess the likelihood of implementing any such strategies in light of the bankruptcy proceeding, and the resulting impact, if any, on the valuation allowance. See TX 5 for further discussion of valuation allowance assessments.