Fair Value/Mark to Market?? Confused

#1

Could anyone who know about fair value accounting or mark to market? I’m searching the current issues that affect accounting. These two terms pop up a lot. And also something about off-balance sheet. Could anyone explain them in plain terms rather than the terminologies used in those articles?

Thanks!!!

#2

Things such as CDO’s (complex financial derivatives, that include debts) were traded as assets and recorded on the balance sheet at their ‘market value’ i.e. how much it would go for at an arms length transaction right now. With the financial crisis (which was in many ways caused by CDO’s etc that had bad underlying debt) the value of CDO’s in the market has fallen. Banks believe these are now actually undervalued. A change in IFRS accounting rules in october due to the financial crisis means that banks can now record these at amortised cost (as if they are keeping the debts for their life time, so the payout is predictable) as opposed to their market value (which at the minute they believe is lower than it should be).

Is that what you mean?

#3

Thanks littlelegs, I found the videos on Youtube!! Going to watch them…

Hi misterme, thanks for your explanation. I seem to understand. Does it mean banks oppose fair value accounting as it undervalues their assets according the the current market price? ‘A change in IFRS accounting rules in Oct’ has taken effect?

This is all I know about it now. I’m not sure how in depth shall I know about it if asked anything about it in the partner interview? Anyone has any experience being asked or had to talk anything about it?

thanks.

#4

I doubt you’ll be asked anything in detail. The key thing to remember is that most accountancy firms prefer Fair Value accounting. PWC have a good write-up here: http://www.pwc.com/extweb/pwcpublications.nsf/docid/0aa6ad79a779df1c85257432005694b0

#5

Finger crossed I won’t be asked in detail about this, as I really don’t know much about it. Even worse is that the more I’m trying to read about it the more confused I get. lol…

#6

There’s a very good point that I’ve been pondering for a while and haven’t been able to get a concrete answer in Cheerios’ post;

“‘A change in IFRS accounting rules in Oct’ has taken effect?” - this is the Economic Stablization Act 2008 by USA in response to Lehman/Fannie/Freddie/AIG wasn’t it, where they were thinking of suspending mark to marketing? Coz it was causing havoc on the securities market? Has this actually been implemented or done so selectively? This is because I semi skimmed an article that said certain banks didn’t use mark to market and some did. Help in calrifying this?

@Cheerios
Mark to market it preferred by accounting firms is because I believe they are more “transparent” and the only viable way to value something right now. The most they’ll ask is your opinion of it I think, i.e. do you think it’s good, or why is it bad? Though I’ve yet to be asked anything like that yet…