Fair Value Adjustment Journal Entry

Introduction

In accounting, the company needs to account for the temporary price changes at the end of the period of its held-for-trading securities and available-for-sale securities in its financial statements. Likewise, the price changes will result in the difference between the cost of securities and their market fair value and the company needs to make the fair value adjustment journal entry at the end of the period.

At the same time, the price changes in these securities will result in the unrealized gain or loss in the income statement for the held-for-trading securities or in the equity section of the balance sheet as other comprehensive income for the available-for-sale securities.

Unrealized gain or loss from held-for-trading securities => Income statement

Unrealized gain or loss from available-for-sale securities => OCI in the equity section of the balance sheet.

Fair value adjustment journal entry

Unrealized gain

At the end of the period, if the market fair value of securities (held-for-trading securities or available-for-sale securities) is higher than their cost, the company makes the unrealized gain.

In this case, the company can make the fair value adjustment journal entry for the unrealized gain from securities by debiting the fair value adjustment account and crediting the unrealized gain or loss account.

Account	Debit	Credit
Fair value adjustment	$$$
Unrealized gain or loss		$$$

Unrealized loss

On the other hand, if the market fair value of securities (held-for-trading securities or available-for-sale securities) is lower than their cost, the company will make the unrealized loss at the end of the period.

In this case, it needs to make the journal entry for fair value adjustment as below instead:

Account	Debit	Credit
Unrealized gain or loss	$$$
Fair value adjustment		$$$

The fair value adjustment account is an allowance account to the fair value of the security. Recording the unrealized gain or loss from the security in this account allows the company to track the difference between the cost of security and its fair value.

Example

For example, on December 15, 2020, the company ABC bought a trading security at the cost of $50,000. However, on December 31, 2020, the market fair value of this trading security drops to $45,000.

In this case, the company ABC needs to record the unrealized loss of $5,000 (50,000 – 45,000) at the December 31 adjusting entry.

Likewise, the company ABC needs to make the journal entry for fair value adjustment on December 31, 2020, as below:

Account	Debit	Credit
Unrealized gain or loss	5,000
Fair value adjustment – trading		5,000

In this journal entry, the $5,000 of unrealized gain or loss is recorded in the income statement as the security is the held-for-trading security.

It is useful to note that the held-to-maturity security is the type of debt investment that the company intends to hold until the end of maturity. So, the company does not need to account for the change of price in the financial statements at all.