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What is a valuation allowance for an AFS investment?

If the AFS investment has a temporary decline in fair value, then the company would record an unrealized loss to other comprehensive income (“OCI”) on the balance sheet. The offset would be a credit to reduce the carrying value of the investment on the balance sheet. This reduction to the investment is sometimes referred to as a valuation allowance.

As you can see, the valuation allowance reduces the fair value of the investment (similar concept as the allowance for doubtful accounts balance). The valuation allowance is a contra-asset.

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