Realized gains and unrealized gains are two concepts used to describe the financial performance of investments held by nonprofit organizations. These terms refer to different stages in the investment lifecycle and represent different types of gains that can impact the organization’s financial statements.
Realized Gains: Realized gains are gains that have been recognized as income because the investments have been sold or otherwise disposed of. In other words, a realized gain occurs when an investment is sold for a price higher than its original cost. It reflects the actual profit earned by the nonprofit from the sale of the investment.
For example, if a nonprofit purchased stocks for $10,000 and later sold them for $12,000, the $2,000 difference between the selling price and the original cost would be a realized gain. This gain would be recorded in the nonprofit’s income statement and contribute to its net income for the period.
Unrealized Gains: Unrealized gains, on the other hand, are gains that have not yet been realized because the investments have not been sold. They represent the increase in the value of investments that the nonprofit still holds. These gains are often referred to as “paper gains” because they exist on paper but have not yet translated into actual cash or income for the organization.
Continuing with the previous example, if the value of the nonprofit’s stocks increased from $10,000 to $12,000, but the organization has not sold the stocks, the $2,000 increase in value would be an unrealized gain. Unrealized gains are typically recorded in the nonprofit’s financial statements, but they are reported in a separate section, such as “Unrealized Gains on Investments” within the equity section of the balance sheet.
Key Differences: The main differences between realized and unrealized gains are as follows:
- Recognition: Realized gains are recognized when an investment is sold or disposed of, while unrealized gains are recognized when the value of an investment increases but has not been realized through a sale.
- Impact on Income Statement: Realized gains directly impact the nonprofit’s income statement and contribute to its net income for the period. Unrealized gains do not impact the income statement directly; instead, they are often reported in the equity section of the balance sheet.
- Timing: Realized gains occur at the point of sale, whereas unrealized gains reflect changes in value over a specific period without any actual sale.
Both realized and unrealized gains provide insights into the financial performance of a nonprofit’s investment portfolio. It’s important for nonprofits to understand and appropriately account for these gains to ensure accurate financial reporting and transparency for stakeholders. Nonprofits should adhere to relevant accounting standards and consult with accounting professionals to ensure proper treatment of realized and unrealized gains on their investments.