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).
Related Terms
The accounting term used to describe an economic resource, which is owned by the corporation and expected to provide future benefits to its operation, is asset. Appearing on the balance sheet, assets are typically broken down into two categories:
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The financial accounting term liability is used to describe the debt of a corporation that results from a transaction involving the transfer of an asset or the provision of a service. Liabilities are reported on a company's balance sheet.Moneyzine EditorNovember 6th, 2024
The financial accounting term conservatism constraint refers to an accounting constraint that states when in doubt, report information that does not overstate income or assets or does not understate expenses or liabilities.Moneyzine EditorJanuary 11th, 2024- The financial accounting term value-in-use is used to describe the present value of future cash flows derived from the use of an asset. Companies will determine an asset's value-in-use as part of a process that evaluates if an asset's value is impaired.Moneyzine EditorSeptember 21st, 2023
The term impairment in value is used to describe an event that suddenly and permanently lowers the value of an asset appearing on the company's balance sheet. When this occurs, companies will write-down the asset to the new market value. Accounts typically affected by impairment include goodwill as well as accounts receivable.Moneyzine EditorNovember 6th, 2024- The financial accounting term recoverable amount refers to the larger of the market value of an asset or the value provided to the company as currently used. The concept of recoverable amounts is oftentimes used in the context of determining the impairment of fixed assets.Moneyzine EditorSeptember 21st, 2023
The financial accounting term fair value accounting refers to the estimating of prices that would be received if an asset were traded or a liability transferred. Fair value accounting can be used to estimate the value of an asset or liability appearing in a company's financial statements. Generally, these estimates are grouped into three levels, which are characterized by the availability of market information.Moneyzine EditorJanuary 17th, 2024
The term cost of disposal is used to describe the incremental expense directly attributed to the disposal of an asset, contract, or cash-generating entity. Cost of disposal is oftentimes a future liability that flows as an expense to the income statement as it is incurred.Moneyzine EditorJanuary 12th, 2024
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