2FM Systems

A portfolio manager, an accountant and a client can look at the same investment and report different gains. And all of them can be correct.

The reason is simple: a gain only has meaning once you know where the measurement starts. That distinction is easy to overlook, and it explains many of the apparent inconsistencies that show up in portfolio reporting.

A position may have been bought several years ago, appreciated substantially before the current quarter, and then been sold this quarter. An accounting statement may show the gain since purchase. A performance report may show only what the position contributed during the quarter. Those numbers should not necessarily match. They answer different questions.

The problem begins when we compare them as though they should.

---

Realized and Unrealized Are Part of the Same Story

Realized gain is the gain crystallised when a position is closed through a sale, maturity or similar event. Unrealized gain is the gain still embedded in an open position. For a reporting period, the important relationship is:

The distinction between unrealized gain and change in unrealized gain is fundamental. Unrealized P&L at the beginning and end of a period are snapshots. What contributes to the period is the movement between those snapshots. This is why a position can generate a large realized gain when it is sold without generating an equally large gain during the quarter.

Imagine a security purchased long ago at 40, worth 90 at the beginning of the quarter, and sold at 100:

From an accounting perspective, the realized gain is 60, measured from the original purchase price. From a quarterly performance perspective, only the 10 from 90 to 100 belongs to the quarter.

The difference between those two numbers is not missing P&L. It was already present as unrealized appreciation at the beginning of the period. When the position is sold, that previously unrealized gain simply moves from the unrealized bucket into the realized bucket.

Three Ways to Choose the Starting Point

LedgerVue makes this distinction explicit through three gain conventions.

Convention	Measured from	Question it answers	Typical use
Gain On Trade	Original acquisition cost	How much did we make on this investment from purchase to disposal?	Accounting statements, realized-gain reports, NAV reconciliation
Gain On Market	Market value at the start of the period	What did this investment contribute during this period?	Performance analysis and attribution
Gain On Cost	Period gain derived from historical cost	The same period economics, computed from cost history	Periods where acquisition history must be present

Gain On Market and Gain On Cost aim to describe the same period economics, but they reach the result differently. That matters when historical data is incomplete. Market-based measurement may still be possible when the original acquisition history is unavailable, while a cost-based calculation can deliberately require that history to exist.

So the gain convention can express not only a reporting choice, but also a data-quality policy.

---

Accounting and Performance Are Two Different Lenses

The gain convention is only one part of the problem. There is another question: what are we trying to explain? LedgerVue separates this into two reporting lanes.

The accounting lane is designed to explain the books. Here, realized and unrealized P&L must use a consistent basis so that the movement from opening value to closing value reconciles correctly.

The performance lane answers a different question: what happened during the selected measurement period? In that context, gains that occurred before the beginning of the period should not suddenly become current-period performance merely because the investment happened to be sold.

Accounting asks where the profit sits today. Performance asks when the profit was earned.

That is why the same closing trade can legitimately show one realized gain on a statement and a different contribution in a quarterly performance report. Neither number is inherently more correct. They belong to different measurement lenses.

Where Reporting Errors Actually Happen

Most problems do not come from choosing one convention rather than another. They come from mixing conventions inside the same calculation.

Suppose unrealized P&L is measured relative to historical cost, but realized P&L is measured only from the beginning of the quarter. The two components no longer describe the same measurement system, and the resulting NAV bridge will not reconcile.

This is not a transaction-data problem. It is not necessarily a pricing problem either. It is a classification problem. Once the same convention is applied consistently, the missing amount usually becomes understandable: it represents economic gain earned before the reporting period that has been treated differently in the realized and unrealized components.

Currency Creates the Same Kind of Illusion

A security can rise in its local currency while producing a loss in the client’s reporting currency because the exchange rate moved against it. Both observations can be correct. One describes the security. The other describes the investor’s economic result.

LedgerVue therefore separates gains into components such as Price, FX and Cross, allowing users to distinguish asset performance from currency effects. This is particularly useful when explaining a familiar client question:

“If the investment went up, why did my portfolio go down?”

The answer is often that the two statements are being made in different currencies.

---

The Broader Lesson

Gain convention is only one of several reporting choices that can make two legitimate reports disagree:

• Costing method can change which acquisition lots are considered sold.
• Trade date versus settlement date can change when a transaction appears economically or in cash.
• Instrument currency versus reporting currency changes the unit in which the result is measured.
• Cash-flow timing conventions can change performance calculations.

None of these choices is automatically wrong. The important thing is that the convention remains explicit and internally consistent. Good portfolio reporting involves more than calculating a number correctly. It means preserving the meaning of the number.

Which Figure Belongs in a Client Report?

For a statement of account or NAV bridge, the objective is usually reconciliation. The accounting view should therefore use realized and unrealized gains measured on a consistent basis.

For a question such as “What did this holding contribute this quarter?”, the lifetime realized gain is usually not the right answer. The performance view should isolate the gain attributable to the selected period.

Very often, they are not. Once the starting point, reporting purpose, currency and timing convention are made explicit, what looked like contradictory P&L usually becomes much easier to explain. That is the distinction LedgerVue is designed to preserve.