Unrealised fair value movement
AccountingThe change in carrying value of an item marked to market, recognised before anything has been bought or sold.
Some assets and liabilities are carried at fair value rather than cost: derivatives, certain investments, investment property. When the market moves, the carrying value is remeasured and the change is recognised even though no transaction occurred.
Depending on the instrument and the framework, the movement lands either in the income statement or in other comprehensive income. Either way it changes equity without changing cash, and on the cash flow statement it is reversed out as a non cash item.
The analytical point is that it is not operating performance. A property company whose profit doubles because its portfolio was revalued has not become better at collecting rent, and a manufacturer whose profit swings on derivative marks has not changed how it makes things.
Strip these movements out before assessing the underlying business, and be careful with any multiple built on a profit figure that includes them. This is a common source of a comp trading at an apparently absurd P/E.
Worked example
A property company reports 340 of profit, of which 210 is an upward revaluation of its portfolio.
Underlying rental profit is 130. The P/E on reported earnings looks less than half of the P/E on the recurring figure.
The 210 is reversed out of operating cash flow as a non cash item, which is the tell. Judge the business on the 130.
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