Everyone knows companies earn income by selling products and services, and some people know companies can earn income by selling assets for more than their book value (gains).
However, few people outside the world of finance know that companies earn income on changes in market conditions such as foreign exchange rates and stock prices. When these gains are unrealized (i.e. the transaction has not occurred but the value has changed in the market) then we call them other gains.
This article defines other gains, lists synonyms, provides examples and journal entries in Excel, and explains differences between other gains and other losses.
Definition
Other gains are unrealized earnings a company records in equity and other comprehensive income (OCI) when the market value of assets and liabilities changes in favor of the company, often due to changes in foreign exchange (FX) rates and changes in the value of securities on secondary markets.
Let’s break down this definition.
“Unrealized Earnings”
Only unrealized earnings are recorded as other gains (in owner’s equity and in other comprehensive income). Realized gains are always recorded as gains on the company’s income statement because they’re benefits settled, i.e the invoice is paid or the transaction completed.
“Equity or Other Comprehensive Income”
Because other gains are unrealized, they cannot be recorded on the income statement. Instead, these values are recorded under owners equity. Typically, gains are netted with losses as one line below retained earnings. Those items are then outlined in detail on the statement of other comprehensive income (OCI).
“FX and Changes in Value on Secondary Market”
Other gains most often occur because of changes in FX rates or changes in the value of marketable securities.
For example, imagine you live in the US and have a client in Europe. You sell a product on 1-Jan-2022 for 10 EUR, with an FX rate of 1.10 EUR/USD, which is equivalent to 11 USD (1.10 * 10). Ten days later, the EUR/USD rate changes to 1.20. The USD equivalent of the 10 EUR is now 12 USD, which means you “gained” 1 USD between the two periods. This value is recorded under owners equity and the asset.
Now imagine you buy a bond for $20 with a 1% coupon rate and a 30 year maturity. The value of this bond on the secondary market at the time of purchase is $21. Five years later, the bond is selling for $26 on the secondary market (regardless of the ROI of the base security). If your intent is to sell the bond at some point in the future, and not hold it to maturity, then you “gained” $5. This value is recorded under owners equity and the asset account.
Synonyms for Other Gains
It’s important to use the term “gain” whenever speaking about unrealized increases in value due to FX and secondary markets. Why? Because it’s the proper way to differentiate these items from gains due to the sale of assets or inventory (which are called “gain on sales of asset,” and “revenue,” respectively).
That said, professionals often use the following terms interchangeably with “gains” when the context allows for it:
- Yield
- Benefit
- Return
- Earnings
- Income
- Reward
- Advantage
Unless you’re familiar with the appropriate context to use these synonyms, however, I recommend you stick to “gains” and “other gains” for the sake of clarity.
Other Gains vs Gains
“Other” gains are characterized by two elements: (1) they apply to short-term assets and liabilities, and (2) they’re unrealized. Both of these must be true to use the term “other.”
Normal gains, on the other hand, represent items such as realized FX impact on accounts receivable or gains from the sale of fixed assets.
Examples with Journal Entries
The best way to understand other gains is to look at examples with journal entries, so let’s look at these four common other gain items:
- Unrealized FX gains
- Unrealized holding gains
- Pension plan losses
- Hedging gains
Unrealized FX gains
ABC Company is a US-based company that buys wheat from France in EUR. It buys wheat on 1-Jan-2022 for EUR 150 at a EUR/USD rate of 1.15, or $172.50. At 31-Jan-2022, the rate has moved to EUR/USD 1.10, or $165.00. This means the company has made an unrealized gain of $7.5 in FX on the liability. The journal entries are:
1-Jan-2022
Dr Expenses $172.50
Cr AP $172.50
31-Jan-2022
Dr AP $7.50
Cr FX Gain Owners Equity $7.50 (this is an “other gain“)
Unrealized holding gains/unrealized hedging gains
EFG Company is a German oil company that buys stock and option positions with excess cash. On 1-Jan-2022 it purchased a call option for $500 for 100 shares with a strike date of 28-Feb-2024. The strike price is EUR 150, meaning EFG can buy 100 shares at EUR 150 each at the strike date (this is the nature of a call option). At 1-Jan-2024, the share price was EUR 160. What was its unrealized gains?
The company should record EUR 1,000 in unrealized market value gains ([160-150]*100 shares) because it can buy the 100 shares at 150 EUR and sell them immediately at 160 EUR. Here’s a comparative table to help illustrate:
The journal entries are:
Pension plan gains
Pension plans are quite complex because they consist of only 3 accounts but depend on more than several moving elements to calculate. Pensions are value based on expected future payout obligations and expected returns on assets held. Changes to these “expectations” can result in other gains.
When a company creates a pension, it records a pension asset or pension liability depending on the size of plan assets or plan obligations. The plan assets consists of contributions, returns on plan assets. The plan obligations consist of service costs, interest costs, and payments to retirees.
These are then adjusted each year to reflect new contributions and service costs to employees. Gains on pension plans occur when the plan assets earn more than expected in the market, or when actuaries change their assumptions that result in lower expected plan payouts.
Imagine, for example, company XYZ Inc. has a pension plan whose liabilities are $500,000. This appears as a liability on its balance sheet.
XYZ Inc. contributes $200,000 to the plan in 2021, and workers earned $80k in benefits for that year. The present value of obligations is discounted at 8%, so XYZ charges $40k (8% * $500,000) to account for the passage of time and adjust the present value to the current year.
In addition, the company expected to earn $30K on the assets through value appreciation in stock holdings, but in fact the return was $35k, so it gained $5k on its expectations.
Finally, the company amortizes a change in the pension benefits that it recorded the year before, and actuaries changed some of their assumptions, so the obligations to employees rose by $10k.
Here is a summary table:
As you can see, the gain on assets of $5k and the loss against actuarial expectations was $10k. This results in a net $5k loss. Unlike other gains and losses, however, pension gains and losses are recorded in the P&L and in owner’s equity.
To be clear, when the P&L results are booked as retained earnings in Pension Accounting, the net impact of the gains/losses is 0 (Dr to P&L and Cr to owners equity results in Dr to owners equity). That said, the gains/losses are listed separately to allow for the compilation of other comprehensive income.
In this sense, other gains/losses in pension accounting are the exception to the rule that other gains are unrealized.
Hedging gains
Hedging gains work with the same mechanics as holding gains shown above. The hedged instrument is nothing more than a financial asset whose purpose it to counteract potential losses on the company’s primary securities, so it’s treated just like the call option example shown above.
Difference Between Other Gains and Other Losses
This article is about other gains, but like we saw with the pension plan example, other losses are intrinsically linked to gains. The only difference between other gains and other losses is the direction of value. Gains are increases whereas losses are decreases.
Remember the conditions for other gains?
1. They apply to short-term assets and liabilities, and
2. They’re unrealized.
Likewise, other losses apply to short-term assets and liabilities, and they’re always unrealized. If not, we would simply call them losses.
Gains & Losses vs Impairment
You may have heard the term “impairment,” which refers to a permanent change in the value of an asset. If the value goes up through impairment, this is a gain. If the value goes down through impairment, this is a loss.
But remember, other gains and other losses almost never apply to long-term assets! Gains and losses from impairment hit the P&L and the asset account, but do not get recorded under owners equity. Why? Because they are realized gains/losses.
Conclusion
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