Mark-to-market accounting is the practice of revaluing an asset quarterly according to the price it would fetch if sold on the open market. Many bankers make fun of it when the sudden seizeup of credit markets in the fall of 2008 drove the clearing prices for key assets held by their institutions to unprecedented lows. But fair value accounting continues to have its proponents, who are equally adamant.
Mark-to-market accounting is the practice of revaluing an asset quarterly according to the price it would fetch if sold on the open market. Many bankers make fun of it when the sudden seizeup of credit markets in the fall of 2008 drove the clearing prices for key assets held by their institutions to unprecedented lows. But fair value accounting continues to have its proponents, who are equally adamant.
Mark-to-market accounting is the practice of revaluing an asset quarterly according to the price it would fetch if sold on the open market. Many bankers make fun of it when the sudden seizeup of credit markets in the fall of 2008 drove the clearing prices for key assets held by their institutions to unprecedented lows. But fair value accounting continues to have its proponents, who are equally adamant.
Investor & corporate executives don’t agree on how to value distressed
assets. But maybe they don’t have to. What the reasons are for melt down of U.S. financial system? Sub-prime mortgages, credit default swaps, or excessive debt? None the those, steve forbes , chairmen of the Forbes Media & sometime political candidate. The main reason for the crisis is “mark-to-market accounting”(Fair value accounting). First of all we understand the concept of “mark-to-market accounting”. Marking to market is the practice of revaluing an asset quarterly according to the price it would fetch if sold on the open market. Here the historical cost is outdated for valuing the assets. It is a key component of what is known as fair value accounting & it is the hottest accounting debate in decades. Many bankers make fun of fair value accounting when the sudden seize- up of credit markets in the fall of 2008 drove the clearing prices for key assets held by their institutions to unprecedented lows. This is the obvious reason because if the bank giving loan on the historical price of the assets but they are ignoring the market value of the assets. When any person is failing to pay the loan, bank seize the asset & try to clear the account with the help of selling this asset. If the historical price is higher than the current market price, bank will get low amount & making loss in that loan. In the US, people became insolvent & banks started seize-up their assets. But the market is frozen, the price of these assets have fallen below the true value. So the marking-to-market pushed many banks toward insolvency & forced them to unload assets at low price, which then caused values to fall even further. Yet mark-to-market accounting continues to have its proponents, who are equally adamant. Lisa Koonce ,an accounting professor wrote that “this is simply a case of blaming the messenger. Fair value accounting is not the cause of the current crisis. The reasons for it are such bad decisions as granting subprime loans & writing credit default swaps…” The investment advisory group of the Financial Accounting Standards Board (FASB) stressed that it is especially critical that fair value information be available to capital providers & other users of financial statements in periods of market turmoil accompanied by liquidity crunches. This view suggests that banks should mark their bonds to the current market price, so the investors would become certain & not having trouble to recapitalized these institutions. Which camp has the right answer? Perhaps neither. We don’t want banks to become insolvent only because of short-term declines in the prices of the mortgage-related securities. Nor do want to hide bank losses from investors & delay the clean-up of toxic assets as happened in Japan in the decades after 1990. We only want the some new multidimensional approaches which regulate both bankers & investors to financial reporting. (Next article: myths of the game by mehul sangani )