Companies carrying big deferred tax assets on their books typically rely on their tax planning strategies to determine whether those assets need a write-down – yet they disclose little about what those strategies entail. That's the conclusion of the Georgia Tech Financial Analysis Lab after its recent study of deferred tax assets and corporate disclosures about the tax planning strategies that drive the accounting.

Deferred tax assets appear on the corporate balance sheet to explain temporary differences between book and tax results based on differences in filing requirements. DTAs represent the expected tax savings associated with future tax deductions when expenses are recognized for financial statement purposes before they are recognized in a tax return.

Under Accounting Standards Codification Topic 740 Income Taxes, companies are required to assess the likelihood that deferred tax assets will be realized and write them down with a “valuation allowance” if there are adequate indicators that they won't be realized after all. DTAs typically arise because of warranties, loan loss provisions, bad debt expenses, unrealized restructuring charges, investment writedowns, and impairment charges, according to the Georgia Tech report.

Chuck Mulford, director of the financial analysis lab and co-author of the report, says there's a big disparity in how companies decide whether to take a valuation allowance against deferred tax assets, and typically little disclosure about the reasoning. As an example, Citigroup reported gross deferred tax assets in its most recently 10K of $56.4 billion with no valuation allowance, indicating it expects to fully realize anticipated tax deductions to reduce future taxable income. And if that doesn't work out, the company has tax planning strategies in mind, including the potential sale of businesses and assets, to generate the taxable income necessary to realize the expected deductions, Mulford notes.

AIG, on the other hand, takes a more conservative view. The company reported gross DTAs of $37.3 billion with a valuation allowance of $25.8 billion to reflect worries over operating losses and an inability to predict profits. The company's disclosure also notes that if it can generate some consistent profitability and come up with “prudent and feasible” tax planning strategies, the valuation allowance could be reduced.

Despite the big difference in approach, neither company provided much detail about any tax planning strategy that might be critical to the accounting, Mulford said. “You often find companies referring to their tax planning strategies, but when you look more closely, you won't find much if any disclosure of what those tax planning strategies are,” he says. “It's just boilerplate. This is information investors could use, but they're just not getting it.”

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