Definition of Unrealized Gains and Losses and Their Importance

Unrealized gains and losses are changes in fair value of assets or liabilities without converting them to actual cash through sale or liquidation. These changes arise from market price fluctuations of financial investments, foreign currency exchange rate changes, inventory value declines below cost, or real estate and fixed asset valuations. Accounting-wise, these gains or losses are recorded in comprehensive income statement or directly in equity based on asset nature and applied accounting standards.

Their importance lies in their impact on financial statements and financial indicators despite not being realized in cash, and they are reversible with changing market conditions, requiring separate disclosure from realized profits to clarify profit sources for investors.

Methods for Calculating Unrealized Gains and Losses

Unrealized gains and losses are calculated based on the following steps:

Stage One - Determining Basic Data:

• Know the original cost of the asset (purchase price + direct expenses)
• Determine current market value through stock exchange or professional real estate valuation

Stage Two - Applying Equations:

• When market value increases: Unrealized gains = Current market value - Original cost
• When market value decreases: Unrealized losses = Original cost - Current market value

Stage Three - Accounting Treatment:

• Record changes in comprehensive income statement or equity
• Update asset book value according to applied accounting standards

Tracking and Managing Unrealized Gains and Losses

• Conduct periodic reviews of owned asset prices like stocks and real estate to monitor changes in market value and ensure financial data accuracy
• Utilize advanced accounting systems providing automatic asset monitoring and volatility calculation based on updated market data
• Continuously monitor financial market movements through trading platforms and financial news sources to track developments affecting investment values
• Establish risk control strategies such as setting specific acceptable loss ratios and using financial hedging tools for value protection
• Create periodic financial reports including unrealized gains and losses details monthly or quarterly to assist management in investment decisions

Practical Examples and Impact on Financial Statements

Practical Examples:

• Financial Investments: Purchase 1000 shares at 50 SAR, price rose to 60 SAR = 10,000 unrealized gain
• Foreign Currencies: Debt worth 100,000 USD, dollar declined from 3.75 to 3.70 = 5,000 unrealized gain
• Inventory: Inventory costing 200,000, market value declined to 180,000 = 20,000 unrealized loss

Impact on Financial Statements:

Statement of Financial Position:

• Increase/decrease in asset values
• Equity adjustments

Comprehensive Income Statement:

• Record unrealized gains/losses
• Impact on net comprehensive income

Accounting Treatment:

• For gains: From Investments to Unrealized Gains
• For losses: From Unrealized Losses to Investments