Why do balance sheets not show unrealized gains?

Question

I was reading a Forbes article about Berkshire Hathaway having 21.7 billion in unrealized gains from stocks it owns, but now only 10 billion since they have gone down. I look all over the internet and incredibly, this isnt accounted for on a balance sheet since stocks are held at "cost". Wouldent it give a better idea to put it at market?

Answer 1

Yes -- it would be a better idea if accounting statements used the fair market value rather than cost.

But anyone who thinks that accounting rules make sense knows nothing about accounting.

Answer 2

Yes, a balance sheet can "mark to market," as listing an asset according to current value.

One reason it's not done is that many assets are not liquid and cannot be accurately priced. Real estate is a prime example.

The stock market is notoriously volatile. Marking stocks to market each quarter might make it hard to compare quarters.

Answer 3

The value of a capital asset can only be recognized once.  Unrealized gains do not make it to the balance sheet to prevent them from being counted twice.   Let's not think about stocks for a minute.  If you owned a construction business and you billed someone $20,000 for a job, you would not record that on your business' ledger because once the customer paid $20,000 it would be recorded.  If you recorded the $20,000 when it was billed and then again when it was paid, you're records would indicate that you had brought in $40,000, when actually you only brought in $20,000.

Stocks are held at cost because you are not taxed (except for dividends) on the value of the stock, you are taxed at point of sale.

As far as giving us a better idea, yes it would.  Publicly traded companies publish their holding index rankings as well, but they're not as easy to locate on yahoo.com/finance; you usually have to go to the companies' websites.

[I think the example above of Real Estate values is an excellent example.]