Finance:Accounting loss

In financial accounting, losses are "decreases in equity (net assets) from transactions and other events and circumstances affecting an entity, except those that result from expenses or distributions to owners.Losses typically result from nonreciprocal transactions or events such as natural catastrophes, exchange transactions, and holding losses." Examples of each of these types of situations are provided below:

1. "Events such as natural catastrophes" in addition earthquakes, fires or floods, can include armed conflicts, traffic accidents or even theft. Their defining feature is that they are nonreciprocal (the reporting entity does not receive anything of measurable economic value in return) and beyond the control of the entity reporting the loss.
2. "Exchange transactions" are incidental to an entity's operations. For example, when an entity sells a machine it manufactured for sale, it recognizes the cost of the machine as an expense (the amount received in the sale is recognized as revenue). If, on the other hand, an entity sells a machine previously used in production, it recognizes a loss if it receives less for the machine than its depreciated value (Depreciation).
3. "Holding losses" result from changes in value of assets and liabilities held by an entity. Many of these losses are only recognized when realized (the asset is sold or the liability extinguished). For example, a company buys a production machine for $1000. At the end of year 1, the market value of the machine is $800. At the end of year 2, the company sells the machine for $600. At the end of year one, the company does not recognize any loss. At the end of year 2, it recognizes a loss of $400. In contrast, some holding losses are recognized even if unrealized. For example, instead of a machine, the company buys a market traded financial instrument. It reports a loss of $200 in year one and another loss of $200 in year 2. Whether unrealized holding losses are recognized is determined by the financial accounting standards (for example IFRS, US GAAP or some other national GAAP) applied.
4. "Nonreciprocal transactions" are rarely recognized in practice. For example, a charitable contribution is a nonreciprocal transaction as the giver does not receive anything of value (other than a feeling of doing good) in return. However, when companies make charitable contributions, they recognize them as expenses not losses. Likewise, taxes, fees or penalties are also nonreciprocal but again companies recognize these outflows as expenses. In contrast, "nonreciprocal gain transactions" are fairly common. For example, if a company receives a government grant, it would recognize this nonreciprocal transfer as a gain.