Realization (finance)

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Realization is generally understood in financial circles as the point at which revenue is recognized, typically through a transaction which involves the exchange of an asset, product, or service for cash or its equivalents.[1]

This approach gives the accounting division a strictly objective basis for changing the books. For example, a homeowner may believe that his house has grown in value during a strong market, or fallen in value during a weak market, but until the house is actually sold for a specific price to a specific buyer, the change in value can only be estimated and is considered unrealized.

Realization of income has important implications for the taxation of the income. Generally income is not recognized, and therefore not taxed, until it is realized.

In the accounting (US GAAP) context, this term has a broader meaning than in the general economic context, in that changes in the market price of marketable securities held for trading (speculative) reasons are considered realized at the end of each accounting period even if the reporting entity continues to hold the securities. Under this system, the easily available current trading prices are used as excellent estimates of the change "on paper" of an asset's value.

This approach to valuing investments is also known as "fair value" (or "mark to market") accounting.