just a quick question, on schweser , page 71 book 2, it says that: If the balance sheet date occurs before the transaction is settled, gains and losses on foreign currency transactions are recognized. Accordingly, the balance sheet amounts are adjusted on the exchange rate on the balance sheet daste, and an unrealized gain or loss is recognized in the income statement. Strangly, the example afterwards shwos that FX rate was $1.60, then $1.56, then $1.50 -so by the end of the year, a loss is recognized of 400, then in january of 600. is the loss of 400 an unrealized loss, and it is reclassified as a realized loss in the next year. because the text is not clear about this…!
the $400 is an unrealized loss, however no reclassification occurs (remember you start your new accounting year and all income statement accounts are zero on 1/1). So you’d show a $400 loss in the I/S @ 12/31/09, and a $600 loss in the I/S in 2010 (just made up the dates, not looking at the example) for a total cumulative loss of $1000. I wouldn’t get too hung up on unrealized vs. realized here - either way its going through your income statement.
This brings up a question I’ve had ever since I read FRA stuff… My question deals with Intercorporate Investments and specifically about Held for Trading securities. unrealized gains from these types of securities are list on the income statement - however I’m unclear as to exactly where. I assume the y are just listed somewhere in non-operating income, however that would mean that these unrealized gains are then also taxed at the appropriate corp. tax rate similar to foreign currency translations. The other option would be to include them in OCI in which case they would not be taxed until later. normally unrealized gains are not taxed and foreign currency translations(FCT) is one of the few instances where this occurs
held for trading securities cannot go through OCI, must go through P&L. Changes in the fair value of the trading securities (unrealized gains/losses) would be temporary differences between taxable income and GAAP income(resulting in deferred taxes).
are you sure that trading secs cause deferred taxes? I thought it was AFS securities.