If we have to define mark to market accounting, we can say, " Mark to market accounting means to show all the assets and liabilities in balance sheet on the basis of current market value. According to this concept, we can also calculate market value of any asset or assets or liability or liabilities instead of showing all assets and liabilities. It is also called fair value accounting. It is suitable to financial companies who trades in shares and other stocks."
For example, If an investor owns 10 shares of a stock purchased for $4 per share, and that stock now trades at $6, the "mark-to-market" value of the shares is equal to (10 shares * $6), or $60, whereas the book value might (depending on the accounting principles used) only equal $40.
Similarly, if the stock falls to $3, the mark-to-market value is $30 and the investor has lost $10 of the original investment. If the stock was purchased on margin, this might trigger a margin call and the investor would have to come up with an amount sufficient to meet the margin requirements for his account.( Example has been taken from wikipedia)
Problems of Using Mark to Market Accounting
There is big problem to traders, if they show assets and liabilities on their current market value instead of book value:
1. The balance sheet of company may be inaccurate, if our expected market value is not current.
2. There may be change values on the balance sheet frequently, if market prices changes frequently. If market value of assets increases fastly for temporary period than liability values, our net worth may show high value which will make our balance sheet against "the fair and current view".
3. I studied Enron Company scandal which did fraud in Maharashtra power supply and ran from India. It was using mark to market accounting as loophole. For showing better net worth, it had inflated its value of assets and decreased its liabilities with false way.
Important Tips for Using Mark to Market Accounting
1. It should be used by financial company and other company should use historical accounting method.
2. If any company gets long term project, its income should estimate as the present value of net future cash flows. If there is not current information of expenses in such project, never use mark to market accounting.
3. For showing true economic value, never recognize future profits of long term project who is facing loss.
Related : Historical Cost Vs Fair Value
For example, If an investor owns 10 shares of a stock purchased for $4 per share, and that stock now trades at $6, the "mark-to-market" value of the shares is equal to (10 shares * $6), or $60, whereas the book value might (depending on the accounting principles used) only equal $40.
Similarly, if the stock falls to $3, the mark-to-market value is $30 and the investor has lost $10 of the original investment. If the stock was purchased on margin, this might trigger a margin call and the investor would have to come up with an amount sufficient to meet the margin requirements for his account.( Example has been taken from wikipedia)
Problems of Using Mark to Market Accounting
There is big problem to traders, if they show assets and liabilities on their current market value instead of book value:
1. The balance sheet of company may be inaccurate, if our expected market value is not current.
2. There may be change values on the balance sheet frequently, if market prices changes frequently. If market value of assets increases fastly for temporary period than liability values, our net worth may show high value which will make our balance sheet against "the fair and current view".
3. I studied Enron Company scandal which did fraud in Maharashtra power supply and ran from India. It was using mark to market accounting as loophole. For showing better net worth, it had inflated its value of assets and decreased its liabilities with false way.
Important Tips for Using Mark to Market Accounting
1. It should be used by financial company and other company should use historical accounting method.
2. If any company gets long term project, its income should estimate as the present value of net future cash flows. If there is not current information of expenses in such project, never use mark to market accounting.
3. For showing true economic value, never recognize future profits of long term project who is facing loss.
Related : Historical Cost Vs Fair Value
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