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How to Calculate Fair Value Adjustment to Stockholders' Equity in Available-For-Sale Security?

Original post by Kathy Adams McIntosh of Demand Media

Companies with excess cash often invest those funds in other businesses' stocks or bonds. They decide whether they want to hold those securities for many years or for a few months. "Available-for-sale securities" refer to stocks or bonds the company purchased with the intention of selling whenever it needed cash. This approach can provide the company a higher return on its investment and the flexibility of cash. At the end of each period, companies calculate the fair market value of these securities and record this adjustment as an unrealized gain or loss. The unrealized gain or loss affects the company’s accumulated other comprehensive income, a component of stockholders' equity.

Step 1

Read the most recent balance sheet. Find the value of the available-for-sale securities from the assets section. This equals the book value of the securities.

Step 2

Log onto a website where daily stock and bond prices are reported. Look up the available-for-sale security you own. Find the closing price for the last day of the period.

Step 3

Multiply the closing price by the number of shares in the securities you own. This equals the fair market value of those securities at the end of the period.

Step 4

Subtract the book value of the securities from the fair market value, if the fair market value exceeds the book value. The difference is the gain in value.

Step 5

Subtract the fair market value of the securities from the book value, if the book value exceeds the fair market value. This equals the loss in value.

                   

Tips & Warnings

  • A company realizes a gain or loss when it sells the security. The value of the security changes whether or not the company sells the security. An "unrealized" gain or loss refers to a change in the value of the security not recognized through a sale. The company records the unrealized gain or loss to reflect the change in value. This change in value appears on the company’s income statement and balance sheet.

References

About the Author

Kathy Adams McIntosh started writing professionally in 2001. She has been published in "Cup of Comfort," "Community Connection" and "Wisconsin Christian News." Adams McIntosh belongs to the Fearless Freelancers and the Broadway Writers Guild. She earned her Master of Business Administration from the University of Wisconsin.

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