Mark to market

From CUP Resources: (n. mark to market; adj. mark-to-market; v. to mark sth to market) What is it? Mark-to-market accounting is a way of assigning a value to financial instruments, based on their current market value (i.e. their price if they were to be sold today rather than held as assets). Mark-to-market contrasts with cost-based accounting, where financial assets are carried at the price that was originally paid for them. As a simple example, imagine shares that were bought for £100 that are now worth £150. The two different accounting methods would carry them differently, and two companies holding exactly the same assets could have radically different values for them in their accounts. In theory, marking-to-market should provide a more accurate picture of a company’s assets, which is useful for investors. One problem is that the market value of financial instruments is not always easy to assess, which creates the possibility for some companies to manipulate the value of their assets, as famously happened in the Enron scandal (see article below). Another problem is that a company using mark to market can be pushed close to bankruptcy suddenly if the market price of its assets collapses – even if it has no intention of selling those assets in the short term – as has happened to many banks in the recent financial turmoil. Why is it in the news? The International Accounting Standards Board (IASB), which sets accounting rules for most of Europe and Asia, has drafted a new set of rules to sort out the current messy situation where different companies use different systems. Under the proposals, very simple financial assets such as loans (and similar instruments) are to be valued at cost. More complex securities, such as derivatives, equities and other financial instruments, are to be carried at market prices. These new rules should simplify the current situation, and allow much easier financial comparisons between companies in different countries. The draft is likely to be approved later this year. Discussion: Students discuss the pros and cons of the two accounting methods (mark to market and cost-based). Reading/speaking/writing: The original IASB draft proposals, linked below, should make interesting reading for accountants and others involved in finance. The purpose of the draft is to elicit feedback from interested parties around the world on various aspects of the draft before it is implemented. Although the document is 37 pages long, the draft proposal itself takes up only 6 pages – much of the rest of the document consists of discussion questions and explanations. Where can I read about it? Coming clean on bank rules, Times, July 15th 2009. Financial Instruments: Classification and Measurement, IASB Exposure Draft ED/2009/7 Mark-to-market accounting, Wikipedia. Mark-to-market accounting in the Enron scandal, Wikipedia.