Question

How should a valuation allowance be presented in the balance sheet?

Answer 1

Deferred tax assets are useful to company in offsetting earnings in the future. Their main objective is to reduce company’s taxable income. Losses are carried forward in the form of deferred tax assets. Many times it is possible that companies realize that it is not possible to take full advantage of deferred tax assets in the future and they offset part of deferred tax assets using valuation allowance. Using it, the amount of deferred tax asset is used to the level it will be useful in future.

Valuation allowances are reported on the balance sheet as noncurrent deferred tax assets an offset of the deferred tax asset.