Mark to Market Accounting
What is Mark to Market Accounting?
Mark to market accounting, also known as fair value accounting can be defined as a method of assessing the value of an asset or liability to showcase its actual market value rather than its initial cost. In financial organizations, the mark-to-market value is determined by finding out the price of the financial instrument in public trading rather than its book value. Mark to market accounting aims to provide a true picture of a firm’s financial position by precise accounting of any changes in the value of its assets and liabilities on a daily basis. Applications of mark to market accounting
The most basic application of the method of mark to market accounting is in the work of stock traders. The stocks of a firm are valued at the end of every trading day based on their closing market rates on the day. The income statement that is generated automatically tracks any net increase or decrease in the value of the securities as compared to the previous day which has a direct impact on the firm’s retained earnings. Another application of mark-to-market accounting is evaluation of a company’s debts based on the current market prices. A fall in the firm’s debt due to any reason may decrease its value on the balance sheet and show higher retained earnings. On the other hand, a rise in the debts may portray a loss in the income statement and lead to reduction of retained earnings. The application of mark to market accounting with regards to the value of securities and public trading debts is more effective when trading in the more liquid stock markets such as nationalized stock exchanges. Advantages of Mark to Market accounting
Experts consider this method as a tool that helps in getting a true picture of the financial situation of a firm as compared to historical cost accounting. •
The mark to market method has also made financial services firms more disciplined, which is not the case with bull and bear...
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