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Evaluating the need for and amount of a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all the positive and negative evidence available to determine whether all or some portion of the deferred tax assets will not be realized. A valuation allowance must be established for deferred tax assets when it is more-likely-than-not (a probability level of more than 50%) that they will not be realized. Entities with gross deferred tax assets are required to undertake a valuation assessment. Being in a net deferred tax liability position does not exempt an entity from this valuation assessment because of the possibility that deferred tax liabilities may not reverse in a manner that provides a source of taxable income.
In general, “realization” refers to the incremental benefit achieved through the reduction in future taxes payable or an increase in future taxes refundable from the deferred tax assets, assuming that the underlying deductible differences and carryforwards are the last items to enter into the determination of future taxable income.
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