Mark to Market

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Definition

Mark to Market is used for measuring the fair values of those accounts, which could alter over time, like liabilities and assets. Mark to Market focuses on providing a practical appraisal of a company’s or an institution’s existing financial condition. Mark to Market is also considered as the accounting related act that is used for registering the value or price of a portfolio, account or security for reflecting its existing value in the market instead of the value that is mentioned in books. Yet another definition of Mark to Market is when a mutual fund’s NAV (Net Asset Value) is done on the basis of the most existing valuation in the market. Thus, the MF’s are marked to market daily to ensure that the investors are fully aware of the NAV of the fund.

However, in case of mark to market, issues can emerge when the measurements based on the market doesn’t reflect the true value of the underlying asset accurately. Such an incident can take place when an entity is forced to do calculations of the price of selling these liabilities or assets during volatile or unfavorable times, like an economic downturn. Such a situation arose during the 2008-09 economic crises where several securities that were included in the balance sheets of the numerous banks couldn’t be efficiently valued as the markets for them had practically disappeared.

The mark to market accountancy is considered to be the best way for creating financial statements. The FASB and the IASB are also of the same opinion. However, shifting to those particular norms could have negative impact on the investors.

The biggest impact of transitioning to accounting on the basis mark to market has been seen on financial liabilities and assets. Financial institutions and banks especially get affected by the mark to market approach.

For ages, the assets have been registered on the balance sheets at the historical costs. But critics are of the opinions that that the method offered investors with not very fresh information, which was irrelevant for making decision. They are instead of the opinion of marking the assets based on the fair value or estimated market value.  

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