Just need some confirmation of some information regarding financial assets. Is the unrealized gain/loss of a financial asset (available for sale, held for trading) for any given period calculated as:
Fair Market Value - Amortized Cost
I made the mistake in a practice question of calculating the unrealized gain/loss of an available-for-sale security by using:
End of Period Fair Value - Beginning of Period Fair Value
Only to see in the solution that they used:
End of Period Fair Value - End of Period Amortized Cost.
The key is that you have to report the security at fair market value; thus, you have to capture the entire gain or loss somehow. If some of it is realized (e.g., through amortization), then only the remainder is unrealized.
I don’t think I’m fully grasping what is going on here. What is confusing me most is that I don’t understand why amortized cost is coming into play when we are dealing with an AFS security, which I thought we carried at fair market value.
I hate to ask, but could you maybe give an example of your explanation?
Ok, I think I finally understand what you mean that you have to capture the entire gain or loss somehow.
The amortization of $3,000 in 2011 is a realized loss for company A. So in order to capture the entire gain, the unrealized gain must equal $48,000 to effectively reverse that $3,000 loss.
Just to follow-up on that one, do we use the same procedure for the FV through P&L securities (i.e. that the unrealized gain or loss is the difference between FV and amortized cost)? Except from the fact that the unrealized G&L are directly reported to net income.