Gains (or losses) describe the incrementation (or decrementation) in the value of an asset or liability for an accounting period.

Holding gains (losses) are generally conceived as increases (decreases) in the replacement costs of the assets held during a given period. Both gains and losses accrue to the owners of assets and liabilities purely as a result of holding the assets or liabilities over time, without transforming them in any way.

Case in Point: If a business holds bottles of wine in its inventory and that particular vintage becomes more expensive on the market, the replacement cost of the wine in the inventory increases as it has become more expensive for the company to replace its current wine stock. Therefore, by the simple act of holding the wine in the inventory, the assets of the company rise in value.

There are different types of holding gains and the types depend on the accounting system your business uses. Holding gains are most frequently used in inflation accounting and income measurement. Holding gains or losses can occur from depreciation, gearing adjustments, stock, or adjustments to monetary working capital, and gains can be of two types: realized (such as sold goods) or unrealized (such as stock).

Realized gains or losses are recognized in the financial statements, and only in rare cases are unrealized losses recognized, as with marketable securities and inventory applying the lower of cost or market value rule. However, permanent reductions in the value of assets (as for obsolete equipment) should be reflected in the accounts. It should be noted that if current cost financial statements are prepared, holding gains and losses would be reflected.

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