Chartered Financial Analyst (CFA) Practice Exam Level 2

Which statement is true for the Fair Value through Profit or Loss category?

1. No realized/unrealized gains or losses recognized

2. Must always be valued at historical cost

3. Unrealized gains/losses are recognized on the Income Statement

4. Values must be disclosed in the equity section of the Balance Sheet

The correct answer is: Unrealized gains/losses are recognized on the Income Statement

For investments categorized as Fair Value through Profit or Loss (FVTPL), unrealized gains and losses are indeed recognized in the Income Statement. This treatment reflects the principle that these investments are intended to be traded or converted to cash in the near term, thereby impacting the profitability of the entity directly. Under this classification, any fluctuations in the fair value of the investment are captured in the financial performance of the period, which provides more relevant and timely information to users of the financial statements. This approach aligns with the goal of presenting a more accurate picture of a company's financial health and performance over time, as it allows stakeholders to see the effects of market changes on the entity's assets regularly. In contrast, the other choices do not align with the characteristics of FVTPL. The absence of the recognition of gains or losses, valuation at historical cost, and disclosure of values in the equity section of the Balance Sheet each misinterpret the core principles governing FVTPL accounting.