Mark-to-market accounting.
In plain English
Mark-to-market, also called fair value accounting, restates certain assets and liabilities to current market prices each reporting period and records the gain or loss even though nothing was sold. It is standard for trading securities and derivatives, where quoted prices exist and historical cost would be misleading. Where no active market exists, values rest on models and assumptions, which is where judgment and disputes enter. The method makes statements more current but also more volatile, and it can force losses into a reporting period during a market panic. Not everything is marked: inventory, plant, and most loans stay at cost-based measures.
01Why it matters
It is why a bank or insurer can report a large loss in a quarter it sold nothing, and why those paper losses can still trigger real consequences through loan covenants and capital rules.
02The math, step by step
Say a firm holds trading securities bought for 1,000,000 dollars that are quoted at 850,000 dollars at quarter end. It records a 150,000 dollar loss and carries the position at 850,000 dollars. If prices recover to 1,050,000 dollars next quarter, it records a 200,000 dollar gain.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Historical cost holds an asset at what was paid, adjusted for depreciation, and recognizes gains only on sale. Mark-to-market updates the value every period whether or not anything trades. Most balance sheets mix both, so which rule applies to which line matters.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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