Thursday, October 02, 2008

Mark-To-Market Rules Effect Everyone

There has been a lot of talk in the news during the current $700B federal bailout discussions regarding the Mark-To-Market (MTM) (also called Marked-To-Market) reporting rules (e.g., FASB 157) that require financial institutions to value their assets at the current fair market value.

It is important that you understand the pros and cons of applying MTM, or not applying as some have proposed. It has direct and indirect (both short-term and long-term) impact on investors, borrowers and lending institutions, as well as our overall economy.

Here are some recent articles/resources that will hopefully give you some explanation and incite into the issues surrounding MTM so you can be better informed:

CNN-Money: The Accounting Rule You Should Care About (10/1/08) [Basic Intro]

Wikipedia: Mark-To-Market Accounting [Intro/background]

The Degradation of Accounting (4/18/08) [Historical background]

The Risk Glossary: Valuation [Detailed intro.]

TradeLog: Mark-To-Market Accounting [as it applies to securities trading]

The Glick Report: Three Fixes For The Economy [opinion]


In situations where fair market value can not be readily and consistently determined for a given asset class, it seems that FASB rules should require the reporting of reductions in asset market value, but not recognizing increases in value over purchase price until realized in the actual sale of asset. (Which implies a kind of modified cash basis for this type of asset?) A potential problem still exists when reporting the loss of market value if it is only based on relatively small sales that were made to clear assets from the books.



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