Mark-to-market accounting Assignment Example | Topics and Well Written Essays - 250 words - 1

Mark-to-market accounting - Assignment Example Another benefit for companies of using such accounting treatment is the recording of unrealized gain on mark to market of financial assets e.g. in the case of investment in shares, the unrealized gain would be the difference between the cost price of those shares and the market price of those shares on which it is currently being traded in the stock market. Mark to market accounting is criticized now and then based on the fact that at times it is quite complicated to accurately determine the fair value of a particular asset or liability. The fair value of financial assets is liabilities are based on the expected income or expense in future periods. Uncertain and volatile economic condition can be major hindrance in forecasting such values. 2) For mark to market accounting it is very essential for trading to be in practice as the buyers and sellers are the two factors who determine the fair value of the assets and liabilities. In times financial crises trading is minimal and the markets are destabilized. The companies, during financial crises, have losses to report on in their P&L statements as the fair value of their assets has decreased below their cost price. Recording of such losses erodes the equity of companies which significantly reduces their asset holding capacity. Since every company in the economy practices mark to market accounting, the affect of economic downturn prevails throughout and the business cycle takes a down turn which causes further exacerbation. The banks and financial institution are affected the most as their balance sheet comprises mostly of financial assets. As a result, bankruptcy, large- scale fire-sale of assets and layoffs takes place. 3) During financial turmoil, relaxation in the requirement of mark to market by the regulators can certainly be a boost for the companies facing financial difficulties. Instead of valuing the assets based on the fair value in the market, the company should be allowed to use