Mark to Market Controversy vs The Laws of Finance
Mark to Market Controversy vs The Laws of Finance

A large part of the mark to market controversy revolves around the fact that mark to market accounting is in direct violation of a fundamental law of finance.

Mark to Market Controversy vs The Laws of Finance

It has long been accepted that when financing assets you should match the term of the debt with the life of the underlying asset. In other words, long term assets should be financed with long term debt and short term assets should be financed with a short term liability.

Mark to Market

Mark to market accounting ignores the liquidity of the underlying asset. In fact, in many respects it converts the characteristics of long term assets into short term assets.
Assume that I am going to finance a house. The house should last at least forty years, consequently, I place a thirty year mortgage on it. Unless I sell the house during the thirty years then I should pay off the mortgage. No problem; everybody wins!
However, what if I were to place a short term debt on a long term asset? I would stand a very good chance of losing my investment in a down economy. The same situation holds true for a lender who makes a long term loan secured by a short term asset.
But a house is a long term asset you say! What is a long term asset? A long term asset is an asset whose expected life is greater than one year. In the case of a mortgage it is a loan whose maturity is greater than one year. The problem with mark to market accounting is that you must treat that asset as if it were sold every day. In effect converting the long term asset into the characteristics of a short term asset.
From the banks perspective you now have a long term asset (ie: mortgage) secured by a short term asset (ie: house). The total opposite of what we are taught in the laws of finance.

Bottom Line

The bottom line is that mark to market accounting distorts the true economics of the transaction versus reflecting it. Mark to market accounting has to go before the banking community can recover.
Download your free External Analysis whitepaper that guides you through overcoming obstacles and preparing how your company is going to react to external factors.
mark to market controversy
[box]Strategic CFO Lab Member Extra
Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]
mark to market controversy
See also:
Accounting Income vs Economic Income
Deferrals Definition
Cost Control vs Cost Reduction


The Accounting Gap Between Large and Small Companies

The Accounting Gap: It’s unfortunate, but true. A large gap exists between the accounting departments of large or publicly traded companies and smaller or private companies. In our past 25 years of consulting we’ve noticed that more often than not, these smaller/private companies will fill the gap with Bookkeepers, rather than the degreed Accountants/CPAs they

Read More »

The Struggles of Private Company Accounting

Building your Accounting Department… When I meet a business owner operating at a successful $10+ mil in revenue I often hear them say “My CPA…” and I immediately know they are referring to a tax CPA. One thing ALL entrepreneurs have in common is that they have to file a tax return. So from day

Read More »

Financial Ratios

See also:Quick Ratio AnalysisPrice to Book Value AnalysisPrice Earnings Growth Ratio AnalysisTime Interest Earned Ratio Analysis Use of Financial Ratios Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The most useful comparison when

Read More »


Financial Leadership Workshop

MARCH 28TH-31ST 2022


Financial Leadership Workshop


June 12-15th, 2023

WIKI CFO® - Browse hundreds of articles