Many times an analyst will have to make judgments as to whether to include unrealized gains and losses when assessing earnings persistence and predicting future profitability. Discuss the case for and the case against including unrealized gains and losses as part of sustainable earnings when examining earnings persistence and future profitability

Answer 1

The case for including unrealized gains and losses:
1 . Unrealized gains and losses closely relate to ongoing operating activities and will likely recur.
2 . Measuring the amount of unrealized gain or loss on certain assets is relatively objective in that active markets exist to indicate the amount of the value changes.

The case against including unrealized gains and losses:
1 . The amount of gain or loss that a firm will ultimately realize when it sells the asset or settles the liability will differ from the amount reported as an unrealized gain or loss in the current period.
2 . The unrealized gains or losses could easily reverse in future periods.
3 . The unrealized gains or losses have no immediate cash flow effect.
4 . Measuring the amount of unrealized gain or loss on certain assets can be subjective if the asset or liability is not traded in an active market.