Mark-to-market refers to a practice of assigning a value to an asset based on its current actual or estimated market price.
The value of an asset needs to be reevaluated periodically in order to ascertain its proper market price, especially if the asset being put up for sale. When an asset is reevaluated, however, its current market price may not always be the same as its previous market price. Its current market price can actually be higher or lower, depending on the economic climate.
In accounting, the term mark-to-market is also called fair value accounting. Its usage is similar to the general use of the term mark-to-market. It entails assigning a value to assets, but specifically refers to the act of recording the value of a security, portfolio, or account based on its current market price. In this case, it includes liabilities and not just assets.
The practice of mark-to-market accounting played a role in the recent subprime crisis in the United States. Because the United States law requires banks to practice fair value accounting and so mark their assets to current market value, when housing values went down, mortgage-backed securities held by the bank also plummeted in value. This resulted in a heated debate with some pointing the blame on mark-to-market-accounting and critics rebutting that pretending that asset prices weren’t down by not practicing mark-to-market accounting won’t really solve anything.
