Mark to Market Accounting (Definition, Examples)| Journal Entries

What is Mark to Market Accounting?

Mark to Market Accounting means recording the value of the balance sheet assets or liabilities at current market value with the aim to provide a fair appraisal of the company’s financials. The reason for marking to market certain securities is to give a true picture and the value is more relevant as compared to the historical value

Examples

#1 – Available for Sale Securities Example

Available for sale securities is the most common example of mark to market accounting. An available-for-sale asset is a financial security that can either be in the form of debt or equity purchased to sell the securities before it reaches its maturity. In cases of securities which do not have a maturity, these securities will be sold before a long period for which these securities are generally held.

Any gain or loss from fluctuations in the market value of assets classified as available for sale will be reported in the other comprehensive income account in the equity section of the balance sheet.

#2 – Held for Trading Example

Another typical example of mark to market accounting; A held-for-trading asset is a financial security that can either be in the form of debt or equity and is purchased to sell the security within a short period, which is generally less than a year.

Any gains and losses from fluctuations in the market value of assets classified as available for trading will be reported as unrealized gains or losses on the income statement.

Journal Entries

#1 – Available for Sale Securities

In this case, the value of the asset is written down or increased as per the market value, and the gain/loss is booked; e.g. Equity shares of worth $ 10,000 are purchased on 1^st September 2016. As on 31^st December 2016 (i.e., Close of the Financial Year 2016), the value of these equity shares is $ 8,000.

Assuming that these equity shares are available for sale, the securities should be recorded at the market value. The mark to market accounting journal entries will be as follows:

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Loss on Securities Available for sale A/c	Dr.	$ 2,000
To Investments available for sale A/c	Cr.	$ 2,000

In the balance sheet, the Investments will be shown at the new amount of $ 8,000 ($ 10,000 – $ 2,000), and the loss will be recorded in other comprehensive income.

Now, assuming that at the close of the next accounting year, i.e., 31^st December 2017, the market value of these equity shares is $ 11,000. As compared to the previous year, the gain is $ 3,000.

The mark to market accounting journal entry for the same will be as follows:

Investments available for sale	Dr.	$ 3,000
To Gain on Securities Available for sale A/c	Cr.	$ 1,000
To Loss on Securities Available for sale A/c	Cr.	$ 2,000

The previous year’s loss is written off from the first available gain, and if there is an excess gain over and above the loss, it is then recorded in the books as Gain on Securities.

In this year’s balance sheet, the Investments will be shown at the new amount of $ 11,000 ($ 8,000 + $ 3,000), and the net gain of $ 1,000 will be recorded in other comprehensive income and at the same time loss will be $ 0.

#2 – Held for trading

A separate account known as “Securities Fair Value Adjustment A/c,” which will be shown on the face of the balance sheet along with the securities account, is created. Any increase or decrease in the fair value is to be adjusted in this account. e.g., Equity shares of value $ 10,000 are purchased on the 1^st of September 2016. As on 31^st December 2016 (i.e., Close of the Financial Year 2016), the value of these equity shares is $ 12,000.

The difference of $ 2,000 is to gain on account of marking these securities to the market. Mark to market accounting Journal entry for the same will be as follows:

Securities Fair Value Adjustment A/c	Dr.	$ 2,000
To Unrealized Gain / Loss A/c	Cr.	$ 2,000

In the balance, the assets will be shown under current investments as follows:

Assets available for trading	$ 10,000
Add: Securities fair value adjustment	$ 2,000	$ 12,000

Now in the second accounting year ending 31^st December 2017, the value of these equity shares is $ 9,000. In year two, the loss to be recognized is $ 3,000. The accounting entries for the same will be as follows:

Unrealized Gain / Loss A/c	Dr.	$ 3,000
To Securities Fair Value Adjustment A/c	Cr.	$ 3,000

In the balance, the assets will be shown under current investments as follows:

Assets available for trading	$ 12,000
Less: Securities fair value adjustment	$ 3,000	$ 9,000

Note: If there is any dividend earned from the sale of these securities, it will be reported as other income on the income statement irrespective of the type of asset classification.

Mark to Market Accounting vs. Historical Accounting

Accounting data is historical. If an asset is purchased, the cost which is paid to acquire the asset along with all related costs for bringing the asset to its location in the required state can also be added to the purchase cost. This cost is then depreciated year on year, and the net value is reflected in the balance sheet of the company.
This value is independent of the market value. The market value can be higher than, equal to, or even lower than the net depreciated asset value recorded in the books of accounts. Accounting does not consider market value.
The recorded is carried out in history because of one of the basic accounting principles of prudence. As per this principle, accountants are expected accountants to be cautious while recognizing gains.
If we tend to value our assets to the market value, we will recognize unrealized gains in the books. Further, there is no specific basis for arriving at the market value in most cases.
So booking assets at book value might end up giving a very unrealistic picture to the users of the financial statements.
There are certain exceptions to the above rule of reflecting assets at the historical value on the face of the balance sheet. As per the accounting standards, certain assets are shown explicitly at the market value at the end of the accounting period. This rule is more specifically designed for financial instruments rather than long-term physical assets like land, building, computer, etc.
The reason for marking these securities to the market value gives an accurate picture, and the value is more relevant as compared to the historical value. Financial securities are generally volatile, and the market value is the only real value of these securities, mainly if these assets are classified as available for sale or trading.