The price paid for an asset may not reflect what it is worth today. A security bought for ₹10,000 could now be valued at ₹11,500 or ₹8,500, even if it has not been sold. Mark to market accounting captures this change by updating the asset or liability using its value on the measurement date.
This approach is widely used for market-linked financial instruments, mutual fund portfolios and futures contracts. However, it does not apply to every asset in the same way. The applicable accounting standards, valuation rules and nature of the instrument determine when and how mark to market is used.
Key Takeaways
- Mark to market accounting values eligible assets and liabilities using current market-based values rather than relying only on their original cost.
- MTM may be performed daily, periodically or on a reporting date, depending on the financial instrument and applicable rules.
- Mutual fund portfolio valuations can affect daily NAV, while MTM gains and losses on futures contracts are settled through the clearing system.
- If a reliable quoted price is unavailable, an appropriate valuation technique may be used under the applicable accounting standards and valuation policy.
- MTM provides more current valuation information, but market volatility, limited liquidity and model-based assumptions can affect the reported value.
Table of Contents
What is the meaning of mark to market?
The mark to market meaning refers to valuing an asset or liability using its current market-based value rather than continuing to show only its original purchase price.
Mark to market is closely associated with fair value measurement. Under Ind AS 113, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date.
This is an exit-price concept. It considers what the asset or liability is worth in the relevant market at a particular point in time, not necessarily what the owner originally paid for it.
The original cost may still remain important for calculating realised gains or losses and for assets measured under the historical-cost or amortised-cost method.
How does mark to market accounting work?
Mark to market accounting updates the recorded value of an eligible asset or liability to reflect its current fair value. The valuation process generally works as follows:
- The asset or liability being measured is identified.
- An observable quoted market price is used where one is available.
- If a directly observable price is unavailable, an appropriate valuation technique may be used.
- The current value is compared with the value recorded earlier.
- The resulting change is recognised and disclosed according to the applicable accounting standard.
Where quoted prices are unavailable, fair value may be estimated using market-based inputs and valuation techniques. These could include prices for comparable instruments, present-value calculations or other models permitted under the relevant framework.
This does not mean that every change in value is always recorded directly as profit or loss. Depending on the classification of the instrument and the applicable accounting standard, the change may be recognised in profit and loss, other comprehensive income or another prescribed account.
When is mark to market done?
The frequency of MTM depends on the instrument and the rules governing it:
- Mutual fund portfolios: Securities are valued for the calculation of NAV on each business day, subject to SEBI’s valuation norms.
- Exchange-traded futures: Open futures positions are marked to the daily settlement price. The resulting MTM profit or loss is settled through the clearing system.
- Financial statements: Eligible assets and liabilities are measured at fair value on the relevant reporting date, as required by the applicable accounting standard.
- Trading and risk-management systems: Financial institutions and market participants may monitor current values more frequently for margin, exposure and risk-management purposes.
Mark to market is therefore not performed at one universal interval. It may take place daily, at the end of a reporting period or at another prescribed frequency.
How is mark to market value calculated?
For a quoted instrument, the basic calculation is:
Current mark-to-market value = Current market price x Quantity held
The change in value can then be calculated as:
MTM gain or loss = Current mark-to-market value – Previous recorded value
The previous recorded value may be the purchase cost or the value determined on the preceding measurement date, depending on the context.
Mark to market example
Suppose an investor holds 100 units of a listed security. The units were purchased at ₹50 each, giving them an initial value of ₹5,000.
If the market price rises to ₹56:
Current MTM value = 100 x ₹56 = ₹5,600
MTM change = ₹5,600 – ₹5,000 = ₹600 gain
If the market price instead falls to ₹46:
Current MTM value = 100 x ₹46 = ₹4,600
MTM change = ₹4,600 – ₹5,000 = ₹400 loss
For an investment that has not been sold, this change would generally be described as an unrealised change in value. Its accounting treatment would depend on how the instrument is classified under the applicable standards.
The figures shown are for illustrative purposes only.
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Why is mark to market accounting important?
Mark to market connects financial reporting and portfolio valuation with current market conditions. This can make the effect of recent price movements easier to see.
Its relevance includes:
- Current valuation: It reflects market-based values as of the measurement date rather than relying only on an older purchase price.
- Visibility of market exposure: Changes in interest rates, security prices and other market factors may become visible in recorded values.
- Portfolio monitoring: Fund managers, financial institutions and other market participants can monitor how price movements affect their holdings.
- Margin management: Daily MTM settlement in futures prevents gains and losses from accumulating without adjustment until the contract expires.
- Financial reporting: Fair-value measurements can provide investors and other users of financial statements with information about current market-based values.
Mark to market does not reveal every feature of an asset. Credit quality, liquidity, cash flows and the reliability of the valuation inputs still need to be considered.
Where is mark to market used?
MTM has several applications across accounting and financial markets:
Mutual funds
A mutual fund scheme’s NAV reflects the value of its assets after accounting for liabilities, expenses and the number of units outstanding. Portfolio securities are valued according to SEBI’s valuation principles and the mutual fund’s approved valuation policy.
Quoted securities may be valued using market prices. Where a security is not traded or a reliable quoted price is unavailable, prescribed valuation methods and approved inputs may be required.
This daily valuation means that changes in the market value of portfolio holdings can affect a scheme’s NAV even if the securities have not been sold.
Source: SEBI Master Circular for Mutual Funds, dated 27 June 2024.
Futures contracts
Exchange-traded futures are marked to market using the daily settlement price. The difference between the previous settlement price or trade price and the latest settlement price produces an MTM profit or loss.
The amount is credited or debited through the clearing system. After daily settlement, open positions are reset to the latest settlement price. Unlike an unrealised change in the value of an investment held in a portfolio, the daily MTM amount on a futures position is financially settled.
If losses reduce the available margin, the trader may need to provide additional funds or reduce the position. Futures involve leverage and can result in substantial losses when prices move unfavourably.
Source: NSE Clearing settlement mechanism for equity derivatives.
Financial reporting
Companies may measure eligible financial assets and liabilities at fair value when required by the applicable accounting standards. The accounting treatment depends on the nature and classification of the instrument.
Ind AS 113 explains how fair value should be measured when another accounting standard requires or permits fair-value measurement. It does not independently require every asset and liability to be marked to market.
Banks and financial institutions
Banks and other financial institutions may apply fair-value measurement to trading portfolios, derivatives and certain other financial instruments. Other instruments may be measured at amortised cost or under another prescribed basis.
The classification and treatment depend on the applicable accounting standards and regulatory directions. It would therefore be inaccurate to assume that every asset held by a bank is marked to market in the same way.
Personal portfolio tracking
An individual may use current market values to estimate the present value of listed securities, mutual fund holdings or other investments. This can provide a more current view of personal net worth than purchase cost alone.
However, this type of informal tracking should not be confused with formal accounting treatment. Assets such as property, collectibles and unlisted investments may not have readily observable or reliable market prices.
Benefits of mark to market accounting
Mark to market can offer several practical benefits:
- Timely information: Values reflect conditions on the measurement date.
- Greater visibility: Market gains and losses are not hidden behind old acquisition prices where fair-value measurement applies.
- Comparable measurement: Instruments valued under a consistent framework may be easier to compare.
- Risk monitoring: Changes in value can highlight exposure to market movements.
- Daily settlement in futures: Regular settlement limits the accumulation of unsettled gains and losses within the clearing system.
These benefits depend on the quality of the pricing data and valuation method. A current estimate is not automatically an accurate estimate if the market is inactive or the inputs are unreliable.
Limitations of mark to market accounting
MTM also has limitations, particularly when markets are volatile or reliable prices are unavailable:
- Reported values can fluctuate: Market movements may create frequent changes in asset values, earnings or other reported accounts.
- Prices may be difficult to observe: Some securities and unlisted assets do not trade regularly.
- Valuation models involve judgement: Estimates may depend on assumptions about interest rates, cash flows, credit risk or market liquidity.
- Distressed prices require careful assessment: A transaction made under pressure may not represent an orderly market transaction.
- Short-term prices may not reflect eventual cash flows: An asset intended to be held for a longer period may still show a temporary decline in current value.
- Different classifications produce different treatments: Similar-looking instruments may affect financial statements differently depending on their classification under the applicable standard.
MTM should therefore be read together with valuation disclosures, liquidity information and the assumptions used to determine fair value.
Mark to market vs historical cost accounting
Mark to market and historical cost accounting differ mainly in the value used and how frequently that value changes:
| Basis of comparison | Mark to market | Historical cost |
| Valuation basis | Uses current market-based value on the measurement date | Begins with the original purchase price |
| Effect of market movements | The recorded value may change as market conditions change | Short-term market movements generally do not change the original cost |
| Frequency | Applied at the intervals required for the instrument or reporting framework | The original cost remains the starting point, subject to depreciation, amortisation or impairment where applicable |
| Availability of inputs | May require quoted prices or valuation techniques | Relies primarily on documented acquisition cost |
| Reported values | Can fluctuate from one measurement date to another | Usually provides a more stable recorded amount |
| Main limitation | Valuation may become difficult when prices are unavailable or markets are inactive | The recorded value may differ considerably from current market conditions |
These are not freely interchangeable methods. The applicable accounting standard determines which measurement basis should be used for a particular asset or liability.
How does MTM affect financial markets?
MTM passes current price movements into valuations, margin balances and financial reports.
In mutual funds, a change in the value of portfolio securities can affect the scheme’s NAV. In futures, daily price movements result in cash settlement of MTM profits and losses. In company accounts, changes in the fair value of eligible instruments may affect profit and loss, other comprehensive income or balance-sheet values.
During volatile periods, falling prices can lead to margin requirements or reported valuation losses. This may influence how market participants manage their positions. However, MTM does not create the underlying fall in market prices. It records or settles the effect of that movement under the applicable rules.
Past performance may or may not be sustained in future.
Common misconceptions about mark to market
A few distinctions can make MTM easier to understand:
An MTM loss is not always a realised investment loss
For an investment that has not been sold, a fall in market value may remain unrealised. However, daily MTM losses on futures are settled through the clearing system and can result in an immediate cash outflow.
MTM does not apply to every asset
The applicable accounting standards and valuation rules determine which assets and liabilities are measured at fair value. Many assets continue to use historical cost, amortised cost or another prescribed measurement basis.
Fair value is not always a quoted market price
A quoted price may be used when a sufficiently active market exists. If an observable price is unavailable, fair value may need to be estimated through an appropriate valuation technique.
A higher MTM value does not assure a profit
An increase in market value represents the position on a particular measurement date. The price may change before the asset is sold or the position is closed.
Conclusion
Mark to market accounting updates eligible assets and liabilities using current market-based values. It is relevant to financial reporting, mutual fund NAVs and daily futures settlement, although the process and accounting impact differ across these uses.
MTM can make current market exposure more visible, but its usefulness depends on reliable prices, consistent valuation methods and appropriate disclosures. It should be understood as a measurement process, not as an assurance of eventual profit or loss.
FAQs
Are all assets marked to market?
No. The applicable accounting standard determines which assets and liabilities use fair-value measurement. Other items may be recorded at historical cost, amortised cost or another prescribed value.
What is a mark-to-market loss?
A mark-to-market loss occurs when an asset’s current measured value falls below its previous recorded value. It may remain unrealised if the asset has not been sold, although futures MTM losses are settled through the clearing system.
What is the difference between realised and unrealised MTM losses?
An unrealised loss reflects a fall in the value of an asset that has not been sold. A realised loss arises when the asset is sold or the position is closed below its relevant cost or recorded value.
How does mark to market affect mutual fund NAV?
Changes in the value of a mutual fund’s portfolio securities affect its net assets and, therefore, its NAV per unit. The securities are valued according to SEBI’s valuation principles and the fund’s approved valuation policy.
When is mark to market done?
The timing depends on the instrument. Mutual fund portfolios and exchange-traded futures are generally valued daily, while financial-statement measurements are performed on the relevant reporting date.
Can mark to market lead to losses?
MTM can record a loss when current value falls, but it does not cause the underlying price decline. The loss may be unrealised for an unsold investment or cash-settled in the case of a futures position.
What happens if no market price is available?
An appropriate valuation technique may be used when a reliable quoted price is unavailable. The method can use observable inputs, comparable instruments or model-based estimates, depending on the applicable standards and valuation policy.
Is mark to market the same as historical cost?
No. Mark to market uses a current market-based value, while historical cost begins with the asset’s original purchase price. The applicable accounting rules determine which method must be used.
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