Realized unrealized forex gains losses

Unrealized Loss.

What is an 'Unrealized Loss'

An unrealized loss is a loss that results from holding onto an asset after it has decreased in price, rather than selling it and realizing the loss. An investor may prefer to let a loss go unrealized in the hope that the asset will eventually recover in price, thereby at least breaking even or posting a marginal profit. For tax purposes, a loss needs to be realized before it can be used to offset capital gains.

BREAKING DOWN 'Unrealized Loss'

For example, assume an investor purchased 1,000 shares of Widget Co. at $10, and it subsequently traded down to a low of $6. The investor would have an unrealized loss of $4,000 at this point. If the stock subsequently rallies to $8, at which point the investor sells it, the realized loss would be $2,000. For tax purposes, the unrealized loss of $4,000 is of little significance, since it is merely a "paper" or theoretical loss; what matters is the realized loss of $2,000.

What are unrealized gains and losses?

Investopedia.

An unrealized loss occurs when a stock decreases after an investor buys it, but he or she has yet to sell it. If a large loss remains unrealized, the investor is probably hoping the stock's fortunes will turn around and the stock's worth will increase past the price at which it was purchased. If the stock rose back above the original price, then the investor would have an unrealized gain for the time he or she still holds onto the stock.

For example, say you buy shares in TSJ Sports Conglomerate at $10 per share, and then shortly afterwards the stock's price plummets to $3 per share, but you do not sell. At this point, you have an unrealized loss on this stock of $7 per share, because the value of your position is $7 dollars less than when you first entered into the position. Let's say the company's fortunes then shift and the share price soars to $18. Since you have still not sold the stock, you'd now have an unrealized gain of $8 per share ($8 above where you first bought in).

Gains or losses are said to be "realized" when a stock is sold. This is especially important from a tax perspective as, in general, capital gains are taxed only when they are realized. Unrealized gains and losses are also commonly known as "paper" profits or losses, which implies that the gain/loss is only real "on paper." This may be true from a tax perspective, but remember that a loss is a loss, whether it's been realized or not.

Saade, Theodore E.

Unrealized gains and losses (also commonly referred to as “paper” gains/losses) are the amount you are either up or down on the securities you purchase but have not yet sold. Generally, unrealized gains/losses do not affect you until you actually sell the security and thus, “realize” the gain/loss. When this is done in a personal account, you will then be subject to taxation depending on the circumstances of the transaction.

For example, if you purchased 100 shares of stock “XYZ” for $20 per share and the stock rose to $40 per share, you would have an unrealized gain of $2,000. If you were to sell this position, you’d have a realized gain of $2,000, and be subject to taxation in a personal account.

Many considerations should be made when deciding on what steps to take with positions at a gain or loss. Tax loss harvesting, short/long term capital gain consideration, and your income tax bracket are some of the important factors to consider. For these reasons, it is important to consult with your tax advisor or a Certified Financial Planner® before making any decisions in regards to selling your holdings.

Kinsey, Doug.

Unrealized gains and losses are simply those amounts that are the result of what a position is worth versus what you paid for it.

For example, if you bought a share of stock at $50 per share, and it's now worth $100, your unrealized gain is $50 per share. If the stock was now worth $10 per share, your unrealized loss is $40 per share.

Realized gains and losses are what get reported to the IRS in a taxable account(versus a tax-deferred or qualified account, like an IRA) when you actually sell the shares. If you sold the shares in our example above, you would REALIZE a gain of $50 per share, or a loss of $40 per share.

Korving, Arie.

When you buy a security, like a stock, the price will fluctuate. If it goes up from your purchase price, you have a gain, if it goes down you have a loss. While you own the security, any gain or loss is just on paper and the term “unrealized” is used to define that fact that you have not actually booked a profit of loss until you sell. Once you sell a security for a gain or loss it’s classified as “realized” and you now have to figure out if you owe tax on the sale or if you can take a deduction for the loss.

About Realized and Unrealized Gains and Losses.

When a company headquartered in one (domestic) country executes a transaction with a company in another (foreign) country using a currency other than the domestic currency, one currency needs to be converted into another to settle the transaction. This conversion from one currency to another creates gains and losses depending on the currency exchange rate.

This topic covers realized and unrealized currency exchange gains and losses.

Realized Currency Exchange Gains and Losses.

Realized currency exchange gains and losses can occur when full or partial payments are applied to voucher or invoice amounts.

NOTE: Gains and losses are calculated on each payment amount instead of the outstanding voucher or invoice amount.

Balance Paid in Full.

In the following examples, the transactions were completed by the receipt of the payment of cash. Therefore, any exchange gain or loss was realized and, in an accounting sense, was recognized on the date of the cash receipt or cash payment.

For example, a U. S. company purchasing items from a British company that requires payment in British pounds must exchange dollars ($) for pounds (£) to settle the transaction. This exchange of one currency into another involves the use of an exchange rate. If the U. S. company had purchased items for £1,000 from a British company on June 1, when the exchange rate was $1.40 per British pound, $1,400 would need to be exchanged for £1,000 to make the purchase.

NOTE: The foreign exchange rates used in this example do not reflect current rates.

Because the U. S. company maintains its accounts in dollars, the transaction would be recorded as follows:

June 1 Purchases . 1,400.

Payment of Invoice #1725 from Sterling Co.

£1,000; exchange rate: $1.40 per British pound.

Special accounting problems arise when the exchange rate fluctuates between the date of the original transaction (such as a purchase on account) and the settlement of that transaction in cash in the foreign currency (such as the payment of an account payable). In practice, such fluctuations are frequent.

For example, assume that on July 10, when the exchange rate was $.004 per yen (¥), a purchase for ¥100,000 was made from a Japanese company. Since the U. S. company maintains its accounts in dollars, the entry would be recorded at $400 (¥100,000 X $.004), as seen below:

July 10 Purchases . 400.

Accounts Payable - M. Suzuki . 400.

¥100,000, exchange rate: $.004 per yen.

If on the date of payment, August 9, the exchange rate had increased to $.005 per yen, the ¥100,000 account payable must be settled by exchanging $500 (¥100,000 X $.005) for ¥100,000. In this case, the U. S. company incurs an exchange rate loss of $100, because $500 was needed to settle a $400 debt (accounts payable). The cash payment would be recorded as follows:

August 9 Accounts Payable - M. Suzuki . 400.

Exchange Loss . 100.

Cash paid on Invoice #823.

¥100,000, or $400, current exchange rate: $.005 per yen.

All transactions with foreign companies can be analyzed as in the examples above. For example, assume that on May 1, when the exchange rate was $.25 per euro (€), a sale on account for $1,000 from a U. S. company to a French company was billed in euros (€4,000). The transaction would be recorded as follows:

May 1 Accounts Receivable - Crusoe Co. . 1,000.

€4,000, exchange rate: $.25 per euro.

If the exchange rate had increased to $.30 per euro on May 31, the date of receipt of cash, the U. S. company would realize an exchange gain of $200. The gain was realized because the €4,000, which had a value of $1,000 on the date of sale, had increased in value to $1200 (€4,000 * $.30) on May 31 when payment was received. The receipt of the cash would be recorded as follows:

May 31 Cash . 1,200.

Accounts Receivable - Crusoe Co. . 1,000.

Exchange Gain . 200.

Cash received on Invoice #7782.

€4,000 or $1,000, exchange rate: $.30 per euro.

Partial Payments.

When the balance is not paid in full, however, the system calculates currency gains and losses on each payment amount instead of the outstanding voucher or invoice amount. The system uses the following formula when performing the gain/loss calculation:

Gain/Loss Amount = (Payment / Average Exchange Rate) - (Payment / Payment Exchange Rate)

Average Exchange Rate = Foreign Amount Outstanding Balance / Domestic Outstanding Balance.

For example, a German company purchasing items from an U. S. company pays in euros (€). The U. S. company must then exchange euros for U. S. dollars to settle the transaction. In this case, the German company is making partial payments rather than paying the balance in full. The transaction would occur as follows:

Partial Payment Transaction: Euros to U. S. Dollars.

The German company purchases items from the U. S. company for €1100 at an exchange rate of €2.00 per $1.00. After a credit memo for €200 is issued, a credit is shown for $50 due to a exchange rate of €4.00 per $1.00, resulting in a balance of €900 ($500).

Before calculating the gain/loss amount, the system must first calculate the average exchange rate by dividing the foreign balance by the domestic balance (€900 / $500 = 1.8 average exchange rate). After a payment of €600 at an exchange rate of €3.00 per $1.00, the loss is $133.33. The system calculates the loss by (Payment Amount/Avg. Exchange Rate) - (Payment Amount/Payment Exchange Rate) or (600/1.8) - (600/3) = 133.33. The resulting balance is €300 or $166.67.

Again, before calculating the gain/loss, the system must first calculate the average exchange rate by dividing the foreign balance by the domestic balance (€300 / $166.67 = 1.8 average exchange rate). The final payment of €300 at an exchange rate €3.00 to $1.00 settles the transaction, resulting in a loss of $66.67. The system calculates the loss by (Payment Amount/Avg. Exchange Rate) - (Payment Amount/Payment Exchange Rate) or (300/1.8) - (300/100) = 66.67.

Unrealized Currency Exchange Gains and Losses.

However, if financial statements are prepared between the date of the original transaction (sale or purchase on account, for example) and the date of the cash receipt or cash payment, and the exchange rate has changed since the original transaction, an unrealized gain or loss must be recognized in the statements.

For example, assume that a sale on account for $1,000 had been made to a German company on December 20, when the exchange rate was $.50 per euro (€), and that the transaction had been recorded as follows:

Dec. 20 Accounts Receivable - Mueller Co. . 1,000.

€2,000; exchange rate: $.50 per euro.

If the exchange rate had decreased to $.45 per euro on December 31, the date of the balance sheet, the $1,000 account receivable would have a value of only $900 (€2,000 X $.45). This "unrealized" loss would be recorded as follows:

Dec. 31 Exchange Loss . 100.

Accounts Receivable - Mueller Co. . 100.

€2,000 X $.05 decrease in exchange rate.

Assuming that €2,000 are received on January 19 in the following year, when the exchange rate is $.42, the additional decline in the exchange rate from $.45 to $.42 per euro must be recognized. The cash receipt would be recorded as follows:

Jan. 19 Cash . 840.

Exchange Loss ($.03X€2,000) . 60.

Accounts Receivable - Mueller Co. . 900.

Cash received on Invoice #22.

€2,000, or $900, exchange rate: $.42 per euro.

If the exchange rate had increased between December 31 and January 19, an exchange gain would be recorded on January 19. For example, if the exchange rate had increased from $.45 to $.47 per euro during this period, an exchange gain would be credited for $40 ($.02 X €2,000).

A balance in the exchange loss account at the end of the fiscal period should be reported in the Other Expenses section of the income statement. A balance in the exchange gain account should be reported in the Other Income section.

Consolidated Financial Statements with Foreign Subsidiaries.

Before the financial statements of domestic and foreign companies are consolidated, the amounts shown on the statements for the foreign companies must be converted to domestic currency. Asset and liability amounts are normally converted to domestic currency by using the exchange rates as of the balance sheet date. Revenues and expenses are normally converted by using the exchange rates that were in effect when those transactions were executed. (For practical purposes, a weighted average rate for the period is generally used.) The adjustments (gains or losses) resulting from the conversion are reported as a separate item in the stockholders' equity section of the balance sheets of the foreign companies.

After the foreign company statements have been converted to domestic currency, the financial statements of domestic and foreign subsidiaries are consolidated in the normal manner. For more information, see Consolidation Overview.

How are Unrealized and Realized Gain and Loss Accounts Used?

When open transactions exist at the end of a period, the ending exchange or translation rate is used to compute the company's current exposure.

If a negative (credit) variance exists between the beginning exchange or translation value of a transaction and the ending exchange or translation value of that transaction, the variance amount is posted to the Unrealized Loss account.

If a positive (debit) variance exists between the beginning exchange or translation value of a transaction and the ending exchange or translation value of that transaction, the variance amount is posted to the Unrealized Gain account. These entries are reversed in the next period, and the process is repeated until the transactions are closed.

Important Accounts Payable and Accounts Receivable reverse the unrealized gain or loss entries automatically the next time they perform an operation affecting the transaction. For transactions revalued in General Ledger, you must enter reversing journal entries manually.

Note The General Ledger application does not post any entries to the realized gain or loss accounts. Accounts Payable and Accounts Receivable are the only applications using these accounts.

After the transactions are closed, the Accounts Payable or Accounts Receivable application calculates the actual gain or loss and posts it to the realized gain or loss account.

The following example illustrates currency exchange and revaluation.

Pierre's Catering Service invoices LGE Corporation for 1500 GBP.

LGE Corporation's base currency is US dollars (USD).

Invoice Date is March 15.

Invoice Due Date is April 15.

Exchange Rate on March 15 is 0.1642.

Invoice is exchanged to $246.30 (1500 GBP * 0.1642) in the base currency.

The sample journal entry to record the transaction is:

On March 30, the invoice remains unpaid.

The exchange rate is now 0.1662.

The base currency invoice value if paid today would be $249.30.

An unrealized loss is recorded by LGE Corporation.

The sample journal entry to record the unrealized loss is:

Revaluation (next period)

On April 30, the invoice remains unpaid.

The exchange rate is now 0.1674.

A reversing entry to remove the unrealized loss ($3.00) must be recorded by LGE Corporation. An entry for the new unrealized loss ($4.80) must also be recorded.

The sample journal entry would be:

On May 1, the invoice is paid.

The exchange rate is now 0.1677.

The base currency invoice value is $251.55.

The sample journal entry to record the realized loss would be: