Ford Motor Company revealed in its 10-K filing that its valuation allowance against deferred tax assets at the end of 2010 was $15.7 billion, one of the five largest among U.S. public companies. Here’s an excerpt from a press report from Bloomberg in March, 2011 regarding this allowance:

Ford Motor Co. (F), after earning $9.3 billion in the last two years, may . . . eliminate from its balance sheet a valuation allowance held against deferred tax assets, it said in a federal filing this week. Keith Naughton, “Ford’s Accounting Revision May Add $13 Billion to Profit, Tax Expert Says,” Bloomberg, March 3, 2011.

Components of Deferred Tax Assets and Liabilities

The components of deferred tax assets and liabilities at December 31 were as follows (in millions):

Required:
1. As indicated in the note, Ford had both deferred tax assets and deferred tax liabilities at the end of 2010.
Some of each were current, some noncurrent. The balance sheets that year, though, reported only noncurrent deferred tax assets and current deferred tax liabilities. Explain why Ford’s current assets and noncurrent deferred tax liabilities were not explicitly reported. Explain what the current and noncurrent deferred tax assets represent.
2. What is a valuation allowance against deferred tax assets? When must such an allowance be recorded? Use Ford’s situation to help illustrate your response. Assume an effective tax rate of 35%.
3. Is the write-down of deferred tax assets permanent? Explain why Ford is able to consider reclaiming its valuationallowance.

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March 31 2010 Deferred tax assets: Employee benefit plans Net operating loss carryforwards Tax credit carryforwards Research expenditures Dealer and customer allowances and claims Other foreign deferred tax assets Allowance for credit losses All other S 6,332 8,590 1,901 2,941 2,477 1,960 6,441 4,124 4,546 2,336 1,428 1,513 252 2,839 23,370 (15,664) 7,706 2,347 27,186 (17,396) 9,790 Total gross deferred tax assets Less: valuation allowance Total net deferred tax assets Deferred tax liabilities Leasing transactions Deferred income 928 1,411 2,101 Depreciation and amortization (excluding leasing transactions) Finance receivables Other foreign deferred tax liabilities All other 1,146 716 334 1,613 6,838 S 868 3,080 719 1,240 2,282 8,732 $ 1,058 Total deferred tax liabilities Net deferred tax assets/(liabilities)