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?
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.