Corporate Finance
A valuation allowance is a reserve established against deferred tax assets, indicating that a company does not expect to realize the full tax benefit of those assets in the future. This is important for accurately reflecting a company's financial position, as it ensures that the balance sheet presents a more realistic view of the potential tax benefits that are actually recoverable. Establishing a valuation allowance involves management judgment about future profitability and taxable income, and it can significantly impact financial statements.
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