Question

What should accounting students know about holding gains and losses.

Open ended question, will thumbs up.

Answer 1

Answer:

Holding Gains and Losses

Definition

The financial accounting term holding gains and losses refers to increases and decreases to the replacement cost of an asset or the value of a liability. Holding gains and losses can be realized as well as unrealized.

Explanation

A company can experience a holding gain or loss merely as a result of owning an asset or liability; this change in value occurs only as a consequence of the passage of time. The reporting of such a gain or loss is normally computed net of inflation. The following examples demonstrate this point:

• A company may hold stock in another corporation, and the value of those shares may increase or decrease as demand for those shares varies over time.
• As the useful life of an asset is consumed, depreciation is used as the mechanism to reflect this loss in value on the balance sheet and income statement of a corporation.
• The value of inventory can also change over time. As products increase or decrease in popularity, companies can adjust its sales price; thereby affecting the value of that same product held in inventory.

Holding gains and losses can be realized or unrealized, and their treatment will vary with the asset or liability. For example, the value of a building may increase over time; but until it's sold, that gain in value is unrealized. Once sold, the gain is recorded on the company's balance sheet; eventually flowing to the income statement.

Generally, the conservatism constraint provides guidance on this topic; stating that all probable losses are recorded and disclosed as they are discovered (realized), while gains are deferred until verified (unrealized).