What is mark-to-market accounting and when does it apply?
Mark-to-market accounting is a subset of fair-value accounting, although the two are frequently conflated. Under fair-value accounting rules, a mark-to-market valuation—the use of the latest market prices to value an asset or liability—is used only when there is an active and liquid market for an identical asset or liability to the one being valued. Otherwise, a “mark-to-model” valuation is required, wherein the company uses the best available inputs (such as prices for similar instruments or, if those are not available, internal assumptions about the asset or liability) to value the asset or liability. So when a company uses fair-value accounting for an asset when (as is the case today) there is no liquid or active market for an identical asset, then the firm shifts to a “mark-to-model” valuation, and does not use mark-to-market accounting. As a result, a relatively low proportion of debt instruments held by banks are actually “marked to market.
