Do Unrealized Gains Affect Liquidity?

by Linda Ray

The amount of unrealized gains you report can have an impact on your liquidity, especially when the figures are based on estimates you derived from a valuation process that tends to provide less than factual information. According to the U.S. Securities and Exchange Commission, in addition to the effect on your liquidity, the value you place on liabilities, unrealized gains and assets also has a material effect on your capital resources and operations.


Unrealized gains are those profits that have not yet occurred. The effects of your purchases are realized when the futures or commodities are sold. When making projections to sell your company or stock in your business, your financial statements include projections based on past performance of the stocks and expected profits. Though intangible, the losses inherently affect your business, the value of your company and your future.


You must disclose the methodology you used to come up with the figure you report for unrealized gains. Additionally, you must let the SEC know whether your figures are based on actual market prices or fair value prices derived through a valuation process. Your reports of unrealized gains must include information about how the potential losses affected your business and how much you determined that loss equaled. To claim reduced liquidity because of unrealized gains, you must disclose the type and the nature of the investments you use to back up your claims.


When reading a company’s financial reports, unrealized gains used to reduce liquidity may be misleading, according to the New York Society of Security Analysts. Earnings reported on financial reports give you only a snapshot of recent activity and do not take into account the historical trends that affect the industry. The losses and unrealized gains may in fact be a part of cyclical happenings that don’t really provide a true picture of the company’s long-term liquidity. At the same time, running unrealized earnings through your income statement does provide a clear picture of your liquidity at the present time.


Unrealized gains are not losses, but are considered gains on paper only. When reporting them, you typically use current market prices that are subject to change, so it’s difficult to get a clear picture of the reality of your holdings at any given time. On the other hand, loans, which also fall under the category of profits and losses you haven’t yet collected, easily can be measured because the value of the loan doesn’t fluctuate according to the market.

About the Author

Linda Ray is an award-winning journalist with more than 20 years reporting experience. She's covered business for newspapers and magazines, including the "Greenville News," "Success Magazine" and "American City Business Journals." Ray holds a journalism degree and teaches writing, career development and an FDIC course called "Money Smart."

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