Mark to market

Marking to market is using the market value of assets (or liabilities) as their book value. This is usually their market value as at a the date of the accounts.

This makes the most sense for assets that do not depreciate and in which there is a liquid market. It is more useful for assets that have volatile prices that are likely to fluctuate from one period to the next.

This is often true of listed securities.

The advantages of marking to market are:

• Companies cannot avoid showing losses in the accounts by not selling securities.
• Marked to market prices are more up to date than historical prices: they are a more RECENT assessment of what assets are worth.
• Marked to market values are determined by an impartial market mechanism, and, assuming an efficient market, are the best estimate available.

The problems with mark to market are:

• Companies can manipulate the accounts by choosing what to mark to market, and what not to. Clearer and more prescriptive rules could solve this problem
• The market prices of illiquid securities may be old, or not indicative of the price at which a large holding may be sold.
• Not everything is traded, so a market price may not exist, so mark to market cannot always be used.

When market prices do not exist, IFRS fair value rules controversially allow marking to model.