UNREALIZED GAINS AND LOSSES: Fair Value Accounting, OCI, Reversals
- Graziano Stefanelli
- 1 day ago
- 2 min read
Unrealized gains and losses arise when the fair value of an asset changes, but the asset has not yet been sold.
These changes may impact either the income statement or other comprehensive income (OCI), depending on asset classification.
1. What Are Unrealized Gains and Losses?
An unrealized gain or loss is the change in fair value of an asset that is still held at the reporting date.
It becomes realized when the asset is sold, settled, or otherwise derecognized.
These changes commonly occur in:
Equity investments
Debt securities
Derivatives
Foreign currency translation
2. Fair Value Measurement and Recognition
Under fair value accounting, assets are remeasured at market value each reporting period.
The treatment of gains and losses depends on the classification of the asset.
Asset Type | Where Changes Are Recorded |
Trading securities | Profit or loss (income statement) |
FVOCI equity (IFRS) | Other Comprehensive Income (OCI) |
Available-for-sale debt (GAAP) | OCI (until realized) |
Derivatives (held for trading) | Profit or loss |
3. Example – Equity Investment (Fair Value through OCI)
Company holds an equity investment purchased at $100,000. At year-end, fair value is $120,000. Under IFRS 9 (FVOCI election):
debit Equity Investment ............................. 20,000
credit OCI – Unrealized Gain .................. 20,000
When sold:
debit Cash ................................................... 120,000
credit Equity Investment ........................... 120,000
transfer cumulative OCI to retained earnings (no recycling to P&L under IFRS)
4. Example – Trading Securities (P&L Impact)
Debt security held for trading increases from $150,000 to $165,000:
debit Trading Securities ............................. 15,000
credit Unrealized Gain (P&L) .................. 15,000
This increases net income directly.
5. OCI vs. P&L: Key Differences
Criteria | P&L (Income Statement) | OCI (Equity Section) |
Affects net income | Yes | No |
Affects earnings per share | Yes | No |
Recycled to P&L on disposal | Yes (GAAP) / No (IFRS-Equity) | Depends on standard |
Volatility impact | Higher | Lower |
6. Reversals and Realization
When gains/losses are realized (e.g., asset is sold):
For P&L items → no special treatment
For OCI items →
GAAP:Â Transfer from OCI to profit or loss
IFRS (debt):Â Recycle to P&L
IFRS (equity FVOCI):Â No recycling; moved to equity directly
7. Disclosures
Companies must disclose:
Methods and assumptions for fair value measurement
Fair value hierarchy (Level 1, 2, 3)
Movement in OCI balances
Reclassification adjustments (if applicable)
8. Fair Value Hierarchy (IFRS 13 / ASC 820)
Level | Input Type | Example |
Level 1 | Quoted market prices | Public stock prices |
Level 2 | Observable inputs other than prices | Interest rates, credit spreads |
Level 3 | Unobservable inputs (models) | Private equity valuations, assumptions |
Key take-aways
Unrealized gains and losses arise from fair value changes in unsold assets.
Their treatment depends on classification: P&L vs OCI.
Realization occurs upon sale, possibly triggering reclassification.
Disclosures help users understand valuation impact and reporting choices.
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