What is Mark-to-Market?
Mark-to-market is an accounting system designed to deal with the problem of valuing assets which do not have a fixed price. It does so by using the current market value of the asset in an attempt to take account of the potential profits or losses the holder has made on the asset. The main drawbacks of the system are that short-term market fluctuations may mean it doesn’t give a fair representation of the asset’s long-term value. The mark-to-market system is most usually used for complicated assets such as derivatives. This is where people trade the right to buy shares in the future rather than trade the actual shares themselves. But technically mark-to-market can be used for any type of asset. The idea of mark-to-market is to produce more realistic accounts than alternative systems which are based on the purchase price of the asset. For example, a firm may own a batch of shares for which it paid $100 US Dollars (USD). Without mark-to-market accounting, the asset would continue to be li
Joshua Ronen: It means that if you hold investments in a particular security, you quantify those securities on your balance sheet at the current market value. But how do you know what the current value is today? Ronen: This is where the problem starts because in an illiquid market where there is a credit crunch, if you have a fire sale of securities, it’s going to be a very low value, and that itself triggers downgrading by rating agencies and potentially more capital requirements, hence the tendency of these institutions to ultimately become bankrupt. In other words, Ronen says, if these institutions didn’t have to value their assets at the current market price when no one wants to buy them, they might be able to get through the credit crunch relatively unscathed. The argument for mark-to-market is it tells investors exactly what buyers are prepared to pay for a security. Cindy Fornelli, the executive director of the Center for Audit Quality, calls it “fair value” accounting. Cindy Fo
