Unrealized gain/loss and valuation

CFA Level I FRA
#1

Dear all,

I have a question regarding the determination of unrealized gain/loss of available for sales securities (" AFS").

I understand that AFS are valued at fair value in the balance sheet. However, how is the periodic unrealized gain/loss determined?

I was looking at my company accounts earlier and I saw that unrealized gains/losses are determined by comparing the fair market value with the AFS’s cost. Shouldn’t it be AFS’s last period’s fair value?

Can anyone shed some light?

Thank you.

Cheers,

Ernest

#2

At the first balance sheet date after purchase, the fair market value is compared to the purchase price; the difference is the unrealized gain/loss. At all other balance sheet dates, the fair market value is compared to the previous balance sheet value; the difference is the unrealized gain/loss.

#3

Thanks S2000, will the revaluation reserve account be affected too? If so, by the unrealized gain/loss?

Just for the sake of clarity, let me use a hypothetical example:

Yr 0: $100

Yr 1: $120

Yr2: $140

According to my boss, unrealized gain/loss for Year 2 is 140-120= $20; but he added on by saying it will be $40 in the balance sheet. I don’t understand what he meant (words in bold).

#4

The balance sheet will have the total unrealized gain/loss since purchase, so at the end of year 2 will be $40: 20 from year 1 and 20 from year 2.

In that sense, it’s no different from, say, depreciation: we have an incremental value every year, and the total accumulated on the balance sheet.

#5

Just one more question, this applies to _ AFS securities only _, right? the unrealized loss/gain from AFS under OCI through equity account.

Thanks S2000 for the explanation!

#6

That’s correct. Unrealized gains/losses on trading securities go through the income statement.

My pleasure.