The term “mark to market (MTM),” also referred to as fair value accounting, is the practice of updating the value of an asset or a liability to reflect its real market value rather than the initial cost of the asset or liability. For financial firms, the mark-to-market value is established by discovering the price of the financial instrument as it is trading via public exchanges rather than relying on book value. The goal of using the mark-to-market process is to provide a realistic summary of a company’s financial situation by accurately accounting for the changes in the price of assets and liabilities on a daily basis.
For most of the 20th Century, mark-to-market accounting was used for transactions conducted via futures exchange. It was not until the 1980’s that it started being used by banks and other large corporations.
The mark-to-market method got official recognition in April 2009 by the Financial Accounting Standards Board (FASB). The requirement was put in place in order to prevent inaccurate measurements of value, which was a common occurrence during the Great Recession of 2008-09. The official use of mark-to-market accounting went into effect in the first quarter of 2009.
Although companies use mark-to-market accounting for all assets and liabilities, it is frequently used with futures accounts to help clarify that margin requirements are met. If margin accounts are not carefully monitored, current market values could cause a margin call for margin accounts that drop below required levels.