Hi people, Wanted to ask a quick question that has been bugging me for a while: When you calculate realized gains/losses for AFS or trading securities, do you compare the selling price to the original cost or the latest carrying value (the latest price at which the security was marked-to-market on your year-end balance sheet) ? Also, same question for calculating unrealized gains/losses? I am a little confused because I saw Schweser calculate these by comparing to original cost whereas in the official FSA book I think I saw them compare to latest carrying value. Many thanks in advance!
for unrealized you compare to last price for realized with cost but when you realize a gain loss all the unrealized gain/losson that security needs to be reversed- best with an example
it’s confusing… but here’s what i found. realized gain is against original cost… unrealized gain is constantly updated… but when you take a realized gain, you are basically erasing the unrealized gain you were showing. say you’re up by $10K on the stock and you show that as an unrealized gain. then you sell the stock… now you are taking a realized gain of $10K and what schweser somewhat describes by its change in MVA an unrealized loss of $10K… but i’d actually call the unrealized loss a contra entry or an adjustment to earlier unrealized loss. i have a few add-on Q’s though… what happens if you are constantly buying and selling the same stock in different quantities (and never going to zero holding). is the average cost always the weighted average at that point??? does cfai cover that? does getting a dividend lower your adjusted cost base? i remember some example in the area with order-driven, price-driven markets etc.
I think its cost Also, this shouldn’t be a point of difference for for unrealized G/L vs realized G/L. Both of them are calculated with respect to the purchase price.
nope unrealised gain/loss for the year is compared to last price unless the security is sold
florinpop Wrote: ------------------------------------------------------- > nope unrealised gain/loss for the year is compared > to last price unless the security is sold agreed, schweser’s MVA stuff is confusing, because they basically imply that if you have a simple unrealized gain of $10K (MVA of $10K) and you sell for the realized gain, that you have an unrealized loss of $10K. but you and i both agree that it’s simply a reversal of prior unrealized loss that has now become realized.
Ok, but isn’t it more like the unrealized gain = change in MVA where MVA = market value - original cost. So eventually, the original cost is taken into consideration…or am i wrong now I’m confused !
mva = value period 1- value period 0
just do what i suggested. you bot a stock and now you are showing a $10K unrealized gain. you know sell it and have a realized gain of $10K… do the accounting. you only gained $10K on the stock. so something has to give.
agree with westbruin, but how do you reverse the unrealized gain then of $10k so that you dont double-count your gains?
if you have unrealised gains of $1 and you sell the security you will have a unrealised loss along with the realised gain/loss
florinpop Wrote: ------------------------------------------------------- > if you have unrealised gains of $1 and you sell > the security you will have a unrealised loss along > with the realised gain/loss we’re saying the same thing. just semantics. i don’t actually think that causes you to have an “unrealized loss”… i think it’s a reversal of prior unrealized gain… but it’s basically the same thing… curious as to wording though.
no it is a unrealised loss you recorded a gain in the previous year now you need to have a loss just think of something really simple when the security is sold you can’t have any unrealised loss/gain for the holding period!! It’s all realised
florinpop Wrote: ------------------------------------------------------- > no it is a unrealised loss > you recorded a gain in the previous year now you > need to have a loss > just think of something really simple > when the security is sold you can’t have any > unrealised loss/gain for the holding period!! > It’s all realised but if the stock’s up, what did you actually take a “loss” on?..i think it’s wording. and you are likely right on the wording. but i don’t consider it a real loss. just a reclassification.
ok buy security at 10 in t0 end of t0 security is 12 - unrealised gain of 2 end of t1 security is sold for 11 - unrealised loss of 2 and realised gain of 1 overall you made $1 so if it’s a trading security income in t0 is 2 and income in t1 is -1