Reference no: EM131003540

Here's an excerpt from a press release by Sonic Solutions in January 2009 announcing a substantial deferred tax asset write-down:
Novato, California (February 5, 2009)-Sonic Solutions (NASDAQ: SNIC) today announced financial results for the third fiscal quarter ended December 31, 2008.
Valuation Allowance. During the third quarter, we established a valuation allowance of approximately $29.6 million for deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" for deferred tax assets previously recorded. We had operating losses in fiscal 2008 and 2009.
The following is an excerpt from a disclosure note in Sonic Solutions' 2009 balance sheet:

Required:

1. As indicated in the note, Sonic Solutions had both deferred tax assets and deferred tax liabilities at the end of 2008. The balance sheets that year, though, reported only deferred tax assets. In fact, it reported both current and noncurrent deferred tax assets but no deferred tax liabilities. Explain why Sonic Solutions' 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 Sonic Solutions' situation to help illustrate your response. Assume an effective tax rate of 35%.

3. Is the write-down of deferred tax assets permanent? Under what circumstances might some or all of the $29.6 million be reclaimed?