Realized vs Unrealized timing

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20cent
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Realized vs Unrealized timing

Post by 20cent »

Assume we are dealing with debt instruments held at FV-PL

Entity A: cost 100$, revalued during the year to 140$, sold at 150$
We would have unrealized gain of 40$, realized gains of 10$

Entity B: cost 100$, not revalued during the year, sold at 150$
We would have only realized gains of 50$.

This is confusing me, I hope my question is not that stupid, thank you
JRSB
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Re: Realized vs Unrealized timing

Post by JRSB »

technically the second one clearly wasn't held at the true fair value? in practice, how often do you revalue FV assets...?
20cent
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Re: Realized vs Unrealized timing

Post by 20cent »

Exactly! A company might revalue daily or yearly, and this frequency will impact the Realized/Unrealized allocation.
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Re: Realized vs Unrealized timing

Post by JRSB »

if it's a quoted debt instrument then there's no excuse really, so all the movements would be FV adjustments perhaps with a small spread impact onPL on disposal.
20cent
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Re: Realized vs Unrealized timing

Post by 20cent »

So do you suggest revaluating right before the sale ?
JRSB
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Re: Realized vs Unrealized timing

Post by JRSB »

I'd say so, technically.
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Marek Muc
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Re: Realized vs Unrealized timing

Post by Marek Muc »

this is actually explicitly required by IFRS 9.3.2.12, i.e. carrying amount should be measured at the date of derecognition
20cent
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Re: Realized vs Unrealized timing

Post by 20cent »

You are correct, I was assuming the carrying amount measured, "present" at the disposal date.
It should be the carrying amount "re-measured" at the disposal date.

Thank you for your input
Leo
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Re: Realized vs Unrealized timing

Post by Leo »

So applying this to an example that would be :

Purchased at 100 LC, sold at 160 LC during the year :

Revalued at the moment of derecognition :

Dt : Carried amount : 60 LC
Cr : Unrealised gain : 60 LC

Dt : cash : 160 LC
Cr : Carried amount : 160 LC

?
20cent
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Re: Realized vs Unrealized timing

Post by 20cent »

Yes I suppose so, however companies do book a realized gains, how do they reach this figure is unkown.
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Marek Muc
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Re: Realized vs Unrealized timing

Post by Marek Muc »

'realised gains' isn't an IFRS term, so you can define it yourself
for example, if a security is sold, you can show all the previous FV movements as realised, just explain in your financial statements what you mean by that

plus received interest and dividends also can be treated as realised
Leo
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Re: Realized vs Unrealized timing

Post by Leo »

Agree with you Marek !

But in case that the company use the option FVOCI, and as OCI is never recycled, the company shouldn't have any realised gain if we apply the text from IFRS right :


Dt : Carried amount : 60 LC
Cr : Unrealised gain (OCI): 60 LC

Dt : cash : 160 LC
Cr : Carried amount : 160 LC

?
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Marek Muc
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Re: Realized vs Unrealized timing

Post by Marek Muc »

well I don't see why you couldn't say that some part of the FV gain in OCI is realised. You just can't recycle it to P/L
Leo
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Re: Realized vs Unrealized timing

Post by Leo »

Yes !

But I'm not sure that this is homogeneous across all corporations.
JRSB
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Re: Realized vs Unrealized timing

Post by JRSB »

Realised vs unrealised is an important term in company law (in some places) because it determines whether profits are distributable - again, not IFRS at all but important in certain cases inc UK.
Leo
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Re: Realized vs Unrealized timing

Post by Leo »

And in IFRS too, one company can say that they bought 100 LC of assets, and now it's 160 LC, in the same year, so, 60 LC should be recorded in the P&L.

Another company may follow the prescriptions written in IFRS< and record 60 LC in OCI and zero in P&L.

I don't know if it's something that matters, but I'd like to know in real life, what your company does. Any feedbacks guys ?
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Re: Realized vs Unrealized timing

Post by Marek Muc »

@Leo the split between P/L and OCI should always be in line with IFRS, the voluntary disclosure of realised and unrealised gains is irrelevant
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Re: Realized vs Unrealized timing

Post by Marek Muc »

JRSB wrote: 08 Jul 2022, 17:28 Realised vs unrealised is an important term in company law (in some places) because it determines whether profits are distributable - again, not IFRS at all but important in certain cases inc UK.
Interesting, so you cannot pay dividends out of profits earned on e.g. fair value changes if you're still holding the investment?

Can you point me somewhere for further reading?
20cent
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Re: Realized vs Unrealized timing

Post by 20cent »

I do believe that Marek addresses the issue reasonably. It is a management decision, after all it's all within our P&L/OCI.

However I believe that this leaves options for some manipulation which could be a little misleading (since I do not think that in their financials they disclose the basis of realized/unrealized gains calculations)
Leo
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Re: Realized vs Unrealized timing

Post by Leo »

Sorry for my silly question earlier.

As Marek said, I realised or realised, it's all in the PL. There should even not be distinction. Just on line as gain that's all.
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Re: Realized vs Unrealized timing

Post by Marek Muc »

Further disaggregation is allowed as per IAS 1.85
JRSB
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Re: Realized vs Unrealized timing

Post by JRSB »

Marek Muc wrote: 08 Jul 2022, 18:29
JRSB wrote: 08 Jul 2022, 17:28 Realised vs unrealised is an important term in company law (in some places) because it determines whether profits are distributable - again, not IFRS at all but important in certain cases inc UK.
Interesting, so you cannot pay dividends out of profits earned on e.g. fair value changes if you're still holding the investment?

Can you point me somewhere for further reading?
actually it's more complicated, seems like FV gains which are based on level 1 is distributable but otherwise not... hope this link works?

https://www.google.com/url?sa=i&rct=j&q ... 3970807156
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Marek Muc
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Re: Realized vs Unrealized timing

Post by Marek Muc »

I see, it's useful to know! thanks for the link, it works (direct link to this doc below)

https://www.icaew.com/-/media/corporate ... -2006.ashx
JRSB
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Re: Realized vs Unrealized timing

Post by JRSB »

Actually in difficult cases this is a topic for lawyers rather than accountants..
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Marek Muc
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Re: Realized vs Unrealized timing

Post by Marek Muc »

I can imagine :)
DJP
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Re: Realized vs Unrealized timing

Post by DJP »

Hello all,

I did not read all comments, but I am replying to the main question and sharing what my company does in this regard (and what I think it should be done).

1- revaluations on each reporting date are presented as "unrealised"
2- when the asset is sold, all previous entries are reversed, and the total gain/loss is recorded as realised

This classication/presentation may be important for tax purposes.

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Leo
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Re: Realized vs Unrealized timing

Post by Leo »

Cristal clear, thanks !
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Marek Muc
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Re: Realized vs Unrealized timing

Post by Marek Muc »

thanks DJP, do you show the realised/unrealised distinction in IFRS financial statements?
DJP
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Re: Realized vs Unrealized timing

Post by DJP »

No, we don't. And that distinction is not an IFRS requirements, as far as I am aware. But for management purposes this is important because some jurisdictions do not allow distribution of unrealised gains, or there may be tax implications.

That said, it could be the case that some subs may have to disclose this information in their separate accounts (because they may be required to under local law), but I am just presuming here.
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Re: Realized vs Unrealized timing

Post by Marek Muc »

Thanks (we discussed non IFRS implications in the posts that you skipped ;) )
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