Mark-to-market

The Reserve Bank of India (RBI) is likely to give banks yet another leeway in accounting for their losses in government securities, potentially saving them hundreds of crores in provisions which will eventually benefit their bottom line, according to a report. 

Mark-to-market (MTM) is an accounting method that records the value of an asset according to its current market price.  For example, the stocks you hold in your brokerage account are marked-to-market every day. At the closing bell, the price assigned to each of your stocks is the price that the larger market of buyers and sellers decided it would be at the end of the day. No other pricing information is included.  

MTM is similarly used to price futures contracts, which is very important for investors who trade commodities with margin accounts. Most agree that MTM pricing accurately reflects the true value of an asset. However,  MTM can be problematic in times of uncertainty because the value of assets can vary wildly from second to second  - not because of changes in the underlying value of assets, but because buyers and sellers are surging in and out in unpredictable ways. It is important not to confuse mark-to-market with mark-to-management or mark-to-model, according to http://www.investinganswers.com. 

Investopedia explains that at the end of the fiscal year, a company's annual financial statements must reflect the current market value of its accounts. For example, companies in the financial services industry may need to make adjustments to the assets account in the event that some borrowers default on their loans during the year. 

When these loans have been marked as bad debt, companies need to mark down their assets to the fair value. Also, a company that offers discounts to its customers in order to collect quickly on its accounts receivables will have to mark its current assets account to a lower value. 

Another good example of marking to market can be seen when a company issues bonds to lenders and investors. When interest rates rise, the bonds must be marked down since the lower coupon rates translate into a reduction in bond prices. Problems can arise when the market-based measurement does not accurately reflect the underlying asset's true value.