Meaning of Mark To Market (MTM)
It refers to the realistic estimate of the financial situation of the market depending on the assets and liabilities present. In some other situations, it is an accounting tool that records the value of an asset with respect to its current market price. It is said that mark to market reflects the true value of an asset as it is decided with respect to the current market price. Certain securities such as futures and mutual funds are marked to the market. It is governed by the Financial Accounting Standards Board (FASB) and is measured in accordance with the generally accepted accounting principles (GAAP).
Use of Mark to Market
At the end of the financial year, a company’s balance sheet will reflect the value of different accounts in different ways. Certain accounts will be marked to market reflecting the current value of the account and few others will reflect the original purchase price of the asset.
Disadvantages of MTM
The value of the asset may change very often due market upturns and downturns making it rather difficult to trace and predict the true value of the underlying asset. It is also problematic to use this while calculating selling prices of the assets and liabilities during unfavourable conditions such as financial crisis. This issue was seen during the 2008 financial crisis when the mortgage backed securities held as assets on banks' balance sheets could not be valued efficiently as the market for these securities had totally disappeared.
Alternative to Mark to Market
The alternative to MTM is marked to model. These are used for assets that do not have a regular market to provide accurate pricing. Historical cost accounting is another alternative. It measures the original cost of the asset. This method is used for sunk costs or fixed expenses. Usually, physical assets are recorded at historical costs and market securities are marked to market.
