Unrealized gains and losses do not have a tax effect. Increases in accumulated unrealized gains result in an increase in deferred tax liabilities. Decreases in accumulated unrealized gains result in a decrease in deferred tax liabilities.
I assume an unrealized loss only reduces deferred taxes. That would mean that the mark-to-market loss would be greater than the reported net-of-deferred-tax loss. Clearly, the Rule is stupid. I’m surprised FASB hasn’t rescinded it.
The intent was to make it more clear when a company incurs losses through bad investments, but I think the change was not thought through well at all.
Changes in the quoted value of investments always were fully reflected in book value. It’s just that prior to the rule change, the impact was through other comprehensive income rather than net income.
I suspect the reasoning was: changes in market prices are handy, so why not include them? But this ends up with a half-baked pie: what happened to the other assets? There would be a huge backlash, if FASB were to require companies to have their total assets appraised quarterly. As Ravi presented so well, market-to-market tells us little about the operation of a business. Of course, we do regularly mark to market our portfolio. In doing so we easily look to Mr. Market for judgment. As Buffett reminds us: it is not Mr. Market’s wisdom we should seek, but his money.
Thank you for taking this out from behind the paywall.
Rule ASU 2016-01 seems an odd change, what was hoped to be achieved by this?
Also is the unrealised loss a deductible for corporate tax purposes?
Thank you.
Unrealized gains and losses do not have a tax effect. Increases in accumulated unrealized gains result in an increase in deferred tax liabilities. Decreases in accumulated unrealized gains result in a decrease in deferred tax liabilities.
I assume an unrealized loss only reduces deferred taxes. That would mean that the mark-to-market loss would be greater than the reported net-of-deferred-tax loss. Clearly, the Rule is stupid. I’m surprised FASB hasn’t rescinded it.
To me, a Brit, it seems daft but one likes to think there was/is some rational reason for its introduction! Though I certainly can’t see one.
The intent was to make it more clear when a company incurs losses through bad investments, but I think the change was not thought through well at all.
Changes in the quoted value of investments always were fully reflected in book value. It’s just that prior to the rule change, the impact was through other comprehensive income rather than net income.
Thank you. I could understand if it was more nuanced, where say the loss was only reportable if the stock had been held for say five years.
In the end though if you are serious about BRK or and any stock for that matter, one goes to the 10Q and ignores the click bait titles?
I suspect the reasoning was: changes in market prices are handy, so why not include them? But this ends up with a half-baked pie: what happened to the other assets? There would be a huge backlash, if FASB were to require companies to have their total assets appraised quarterly. As Ravi presented so well, market-to-market tells us little about the operation of a business. Of course, we do regularly mark to market our portfolio. In doing so we easily look to Mr. Market for judgment. As Buffett reminds us: it is not Mr. Market’s wisdom we should seek, but his money.
Fine analysis, Ravi!
Thank you so much for the write up and for sharing it with everyone!!