Mark to market (MTM) is an accounting method that values an asset, portfolio or account at its current market price instead of an assumed book value. An asset’s mark to market value reveals how much a company gets if it sells it at that point in time.
Mark to market is sometimes called fair value accounting or market value accounting. The alternative to mark to market is historical cost accounting, which keeps an asset’s value on the books at its original level.
Investors need to be aware if a company’s assets have declined in value. If not, the company might overvalue its net worth. Mark to market should deliver an accurate, current value of an asset.
How does mark to market accounting work?
Mark to market accounting works by valuing company’s assets at their current price according to prevailing market conditions. These valuations are typically used in financial statements at the end of each fiscal year.
Estimating market value can be easy, especially if the assets are bought and sold often. Shares or bonds, for instance, are regularly traded on the markets. So if an investment firm holds them, an accountant can quickly provide a fair market value for the assets.
Other assets might be trickier to value. Fixed assets such as property investments, for example, aren’t as liquid or easy to dispose of, particularly in falling markets.
In the US, mark to market accounting is overseen by the Financial Accounting Standards Board (FASB), which defines fair value and measures it under generally accepted accounting principles (GAAP). Assets must be valued for accounting purposes at that fair value and updated regularly.