Mark-to-market accounting, also referred to as “marked-to-market” accounting, is the procedure used to obtain the market value of assets and liabilities through daily revaluation rather than referring to the “book value”.
This accounting method is used to assess the true value of assets and liabilities, as it shows their current market price and gives a more realistic picture of a company’s financial position.
Originally introduced to assess the value of futures contracts, mark-to-market accounting has become prominently used in over-the-counter derivatives (OTC) markets, including spot trade and forward contract markets.
It is considered an accurate method based on market conditions at any given time, but it has also received criticism because, in volatile times, it can provide results that do not accurately portray the true value of an asset or liability.
If, for example, investor confidence in a certain market dissipates, an asset’s value could fall sharply based on the current market conditions.
Additionally, it has been associated with financial fraud and scandals.
An investor purchases 100 shares in a company for $10 per share. The book value of their investment is $1,000.
On the trading day following the purchase, the company’s stock price falls by 10%.
The mark-to-market value is therefore $900. The book value remains $1,000.