Mark to Market Campaign
Mark to market accounting has become increasingly popular over the recent past. Also referred to as fair value accounting, the practice has become quite beneficial in many aspects of the economy. It updates the value of a liability or an asset to reflect its real market value as opposed to its original cost.
For financial institutions and firms, mark to market accounting is established by discovering the price of a specific financial instrument in trading, via public exchanges. Fair value accounting eliminates the use of book value as a financial tool. The goal of this strategy is to provide a more realistic summary of company’s financial situation, by accurately providing an account of all changes in the price of assets and liabilities. A clear summary must be provided on daily basis.
For the past years, mark to market accounting was used on a number of transactions conducted via futures exchanges. However, in early 1980’s it was adopted by large financial corporations and financial institutions to find the prices of assets and liabilities.
Mark to market method also got its official recognition in 2009 by the Financial Accounting Standards Board. This requirement was specifically put in place to prevent inaccurate and irrelevant measurements of value. This was a very common occurrence during the Great Recession and the Financial Crisis of 2008. Therefore, the accounting system was later adopted and went into effect during the first quarter of 2009.
Even though many companies adopted mark to market accounting for liabilities and assets, it has been used over the years with futures accounts. This is a step aimed at ensuring that there is a clear margin and that margin requirements are fully met. If margin account requirements are not met or monitored, the current market value of assets and liabilities will not be achieved. What’s more, the value could easily lead to a drop in margin accounts below the required level.
Through fair value accounting, the value of assets and liabilities is also recorded in financial statements. When the market swings, financial statements do the same. The state of underlying economies and economics do not matter. The current market has however demonstrated a pro cyclicality and other mark to market rules to ensure the strategy is beneficial.
Mark to market accounting is appropriate asset held only for trading purposes. It can also be used if a business entity is specifically managed on fair value. In such a situation, the expected cash flow will be based on buying and selling of assets in the market. Therefore, mark to market will approximate cash flows.
Additionally, mark to market is required by commercial banks. Investment securities are often traded on fair value. The market is more of a determination as opposed to OTTI or other than temporary impairment. This is because market value can be recorded in capital or in OTTI.
Research however shows that mark to market has an impact on capital that is recorded publicly. The market has also brought in different areas that need to be addressed to ensure mark to market accounting is used as designed. They include a clear definition of fair value and the definition of OTTI.
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