Accounting for the tax benefit from the carryover of net operating losses.?

My question concerns accounting for Net Operating Loss carryovers. Has there been a change in the last year in the accounting for Net Operating Loss carryovers? My understanding is that the tax benefit arising from the carryover of net operating losses is to be recognized as an asset even though one cannot be certain that there will be enough income to use the loss carryovers. Is this correct?

Yes, your understanding of deferred tax assets is correct. When the journal entry is booked for current period tax benefit, it looks like this:

Dr. Deferred Tax Asset (Asset)
Cr. Benefit from NOL Carryforward (Income, or contra-expense)

The uncertainty of the deferred tax asset is taken care of with annual (at least) impairment testing. If the firm doesn't expect to reap the benefit of the full asset, it is written down with a valuation allowance account to reflect the expected realizable value. This treatment isn't particularly aggressive - that's how we treat all our assets. Accounts receivable may not be collected, but we keep them on the books and use the allowance account to show them at NRV. Goodwill is booked at the time of the acquisition, and then is tested for impairment at least annually. And Lord knows we have no real idea what Goodwill is for, other than a plug to make the journal entry work.

Enjoy :)

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