This video shows the effects of reversing a deferred tax asset valuation allowance on the financial statements. Whereas the recognition of a deferred tax asset valuation allowance increases income tax expense and decreases profit, the reversal of some or all of the valuation allowance reduces income tax expense and thereby increases profit. For this reason, some companies will recognize a larger valuation allowance than is necessary, and then reverse portions of the valuation allowance in future periods when they want to boost their profits. The deferred tax asset valuation allowance is thus a frequent source of earnings management.