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What is the distinction between realized profit and unrealized profit?
Is it also true that Unrealized profit is recorded in statement of other comprehensive income while the realized profit is recorded as revenue in SOPL?
Can you also explain what does it mean by fair value adjustments in consolidation and what are their examples?
Profit is realised when something has actually been sold.
An example of unrealised profit is this: suppose a business has some money in a foreign currency. At the end of the year it might have increased in value because the exchange rate has changed. However if they still have the foreign currency the profit is unrealised (it is only realised when they actually convert the currency).
In Paper FA the only calculations that are asked with regard to unrealised profits are this arising from inter-company sales in consolidations. This (and fair value adjustments) is explained in detail (with examples) in my free lectures on consolidations.
Thanks for your answers but You did not comment on this question.
Is it also true that Unrealized profit is recorded in statement of other comprehensive income while the realized profit is recorded as revenue in SOPL?
Secondly, what i understood from your lecture on fair value adjustments is that it is an actual change in the market value of assets and liabilities and we have to reflect these changes in our financial statements.
For example the non current assets are revalued and have $50000 more than its book value which means that it is unrealized gain (until the asset is actually sold and we received cash in return), and also, we need to increase our assets by $50000 in SOFP?
Unrealised profits are recorded in the statement of comprehensive income as I do explain in my lectures. Realised profits are automatically recorded in the SOPL (and therefore also in the statement of comprehensive income).
As far as the fair value adjustment is concerned, for Paper FA this is only relevant when preparing consolidated accounts (and does not affect the accounts of the individual companies). We do increase the value of the assets in the consolidated SOFP but the fact that it is unrealised is irrelevant in the consolidated statements – it is only the increase in value at the date of acquisition and so does not affect future profits of the group.
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