Controlling the real-world risks of mark-to-market valuation

Mark-to-market accounting requires that certain balance sheet assets be priced at their current market value, even if they do not have to be sold and even if the market is not liquid. The practice had a significant impact on the banks that hold so-called "toxic assets" - affecting their ca...

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Bibliographic Details
Published in:Accounting Today 2009-06, Vol.23 (9), p.12-12
Main Author: Henning, Steven L
Format: Article
Language:English
Subjects:
Auction rate securities
Balance sheets
Bank assets
Company organization
Company restructuring/company reorganization
Company securities
Fair value
Mark to market accounting
Municipal bonds
Reorganization and restructuring
Risk management
Securities
Securities industry
Valuation
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Summary:Mark-to-market accounting requires that certain balance sheet assets be priced at their current market value, even if they do not have to be sold and even if the market is not liquid. The practice had a significant impact on the banks that hold so-called "toxic assets" - affecting their capital, liquidity and credit-worthiness. There are problems associated with mark-to-market - and not just the problem of compulsory low valuations that the banks have complained about, and that the FASB interpretations were designed to address. In fact, many problems related to fair value originate before a valuation crisis occurs - when companies accept too-optimistic valuations and use them as the basis for strategic plans, or fail to anticipate that markets might become disorderly and force changes in the way certain assets perform. Companies need to be aware - before a crisis hits - that the application of fair value rules may be painting too rosy a picture of the assets. And the logical next step is to take a hard and skeptical look at the balance sheet - at the first signs of trouble, and well before the trouble becomes a crisis. A restructuring specialist will take a forensic approach to balance-sheet analysis, and develop contingency plans that can prepare you for the worst case, where restructuring is in fact required.
ISSN:1044-5714