Monday, June 15, 2009

Learning Module One: Group Assignment Intermediate ACC II

Please read the article located at the link above and then post what you think about the issues presented in relation to Mark to Market Accounting. Add your comments to the blog and then respond to one other comment made by another student in the class. We will then come up with a class consensus on Mark to Market Accounting!

32 comments:

Click on the Commnet button to Post your thoughts!

I agree that marking TS and ASF investments to market is a more accurate reprensentation of the current value of the assets but in a market as volitle as ours has been over the last two years, it can prove to not be that accurate.

Especially since the value can fluctuate so much on a daily basis. That being said, I would recommend using the LCM.

I think that all of the investments should be valued in the same way, includind equity securities otherwise there wouldnt be any consistency in the accounting.

I do think the market varies to much to use the market value appoach, it can/does change daily.

I believe that the LCM method is a more accurate overall practice as it takes into account a ceiling and a floor thus not allowing for as drastic of a change in value.

I agree with Tonda, I think that all investments and assets should be valued in the same manor. If companies use the marking to market approach then they definitely need to know they own, or at the years end the investments can be valued at a whole lot more than it could actually be worth.

The market fluctuates so much that I think it would definitely be better for the companies to use the LCM- lower of cost or market rule instead of the marking to market values approach.

The books should be on a level playing field not on an inflated playing field.

abw282 posted to this blog, but I dont know who you are, so unless you tell me your name, you will not get credit for this assignment

In trying to determine how to approach this assignment, I have done a lot of reading and research on Mark-to-Market concepts and issues, especially the crisis(es) within financial institutions caused by the different security valuation methods. Although FASB 157 will aid investors in the evaluation of a company by classifying assets into three Level categories, it does not fully address all market issues created by Mark-to-Market valuation and does not solve long-term issues. Reliability and usefulness of Mark-to-Market can vary based on the type of business unit that is reporting the assets (financial institutions versus corporate manufacturing, etc.) and also upon who is using the information, for what purpose the information is used, or by the type of decision being made (outside investors versus internal management, etc.). History has shown that there are pros and cons to both the Cost method and the Fair Value (Market Value) method. Fair Value dates back many years; however, became more expansively used in the late-70s, after the early-70s financial crisis which was caused by inconsistency in reporting security valuations. Accounting practices leading up to that crisis allowed for Cost method, Fair Value method, and/or some combination of both. In the 1980s, the Cost method was partially blamed for the savings and loan crisis. This caused the Fair Value method to become even more prevalent and eventually, the primary accepted practice. Then, recently, Mark-to-Market was the major contributor to the mortgage and banking crisis, as discussed in the Mark-To-Market Mayhem article.

In response to Tonda, using Mark-to-Market valuation for current assets, such as Trading securities and Available For Sale securities, definitely gives a more accurate measure of the economic value of a company. Marking to market does, however, greatly skew a companys financial picture in times of a bear market. I agree with Tonda that using Lower of Cost or Market would be the most conservative and best method of reporting in financial statements. However, if Cost is used, then the Market values of current assets should be noted in the footnotes, and vice versa, as a comprehensive evaluation tool.

I agree with Donna that FASB has a lot of work to do,with the constant flutuation of the market it is an unenviable task.

After reading the blog post, I feel that the mark-to-market appraoach will cause a lot of companies books to be valued wrong. Using WaMu as anexample is a good choice because it shows how a company can thrive one day and by the next business day can fail drastically. Using the LCM would have prevented this down fall. With the market flucuating everyday, noone can say for sure what the value of something will be, so for investors as well as the company itself, itis best ot use the LCM approach. Doing so can assure that a company will not report having a higher assest valuation than they really have.

I think that Mark-to-market is a measure of the fair value of accounts that can change over time, such as assets and liabilities. It is the act of recording the price or value of a security, portfolio or account to reflect its current market value rather than its book value. For example, mutual funds are marked to market on a daily basis at the market close so that investors have an idea of the funds net asset value.The equity securities should be valued the same way because it is more accurate with the current value.The market does fluctuate way to much and I agree with using the LCM because it is an approach to valuing and reporting inventory. Normally ending inventory is stated at historical cost (what was paid to obtain it) but there are times when the original cost of the ending inventory is greater than the cost of replacement thus the inventory has lost value. If the inventory has decreased in value below historical cost then its carrying value is reduced and reported on the balance sheet.Any loss resulting from the decline in the value of inventory is charged to Cost of Goods Sold.

I agree with mostly everyone on the blog. I think that we all are on the right track I hope.

If I understand this correctly, an asset can be recorded at Lower of Cost or Market (LCM), Cost, and the most extreme, Mark to Market (MTM) value of an asset.

I like the proposed FASB 157-d, which allows companies to still use Mark to Market when valuing assets, in an active market. Now to do so each asset has to be categorized as levels 1, 2, or 3, whereas and asset that is level 3, being the most difficult to define at fair market value. This proposal also clarifies how to determine if the market is active or inactive by looking at the different class of assets as opposed to the overall market, the activity in the market itself, how current are prices and do prices vary. Economies slope up and down, and by allowing the MTM approach to reporting assets, investors can make money during an upswing in the economy. I think because the market does fluctuate, it would be wise to read the footnotes on which assets are valued at MTM before making your decision to invest.

Equity securities defined as securities issued to the owner or owners in exchange for operational assets. These securities are not publicly traded and difficult to place a fair value on therefore these assets should never be valued at MTM.

Using LCM is the safest approach to reporting an asset, but this approach will more than likely not allow for speculative opportunities in the market.

Donna I like your blog. It is evident you did a lot of research on the subject for this assignment. You are right in your statement that by using Lower of Cost to Market would be less likely to cause impulsive trading, but wheres the fun in that?

Tamatha Patterson said.

I believe trading securities and available for sale securitites are mor accurate since MTM is recorded at the current market balue instead book value. Yes, i believe that equity securities should be valued the same way so that people do not have something to worry about and there will be competition.I believe that markets do vary on a dailey basis. I think the LCM is the best out of all them since companies have mark their assets down to cost or market which ever is lower. I believe its more accurate.

Tamatha Patterson said.

I argree with Donna seems like she did a great job on researching. Also about the LCM method i believe it is less likely to cause panic too.

Anita Pingley said.

What I have learned from this article is that when large corporations that are investing large amounts of money they should be using LCM because then they will not find themselves in the situation that Washington Mutual was in.

In 1980s these companies started using mark-to-market accounting and they stopped recording their assets at cost.

According to GAAP companies are supposed to record their value of assets at cost not market value.

Using LCM is a rule in which companies have to mark their assets down to cost or market which ever is lowest. This will ensure the companies investments will not be artificially inflated on the books.

Anita Pingley said.

I think everyone so far has done a great job explaining this situation.

Responding to Kelly Morris blog I personally think that FASB 157-d is just another disaster waiting to happen. Maybe if better regulated it may be an effective valuation tool in the future. However, I believe for the investor to get the confidence back for them to invest in corporations again, companies need to be posting actual costs and not fictitious values on their assets. Using LCM or at cost is a more realistic approach. I feel that while companies was using the MTM during 2007 and 2008 that when trouble arise in 2009 it was too late for companies to respond which resulted in the crumpling of the Mortgage and Banking business.

I agree with you Donna, if Cost is used, then the Market values of current assets should be noted in the footnotes, and vice versa for a more general valuation. MTM is total mayhem because there is no great way of valuing these assets. When it comes to valuing trading securities, they are initially recorded at cost and then later when the balance sheet is prepared the securities are recorded at fair value. This seems ok, but in a bear market the assets could become worthless quickly, as weve all seen. I would say its fair that these securities need to be recorded at cost or LCM. I think everyone has done a great job.

I think there are pros and cons to any method used and good or bad some corporations will find a way to benefit unfairly. The LCM method is conservative and would provide consistency among users. The conclusion of the article says it all in my opinion. be informed as to the accounting practices used in the footnotes of a companys stock reports.

I have read the article and all of the comments that have been posted. You all have very good points. The market isnt in the best shape right and even if it was I dont think it would make too much of a difference the market values would still be changing too much for MTM to be very accurate. LCM should be the way to record the books. With dealing with equity securities like the article said could be done with MTM and not inflate the books but I think you should just pick one way to do the books and stick with it. Overall i would still go with LCM.

great job all and it looks like we are all thinking the same way.

Zoe said.

First, Trading Securities: these are generally only held for a very short time; I cant see there being that drastic of a change in value whether you are using MTM or LCM. I think MTM would actually be more acurate for TS because of their short holding period.

Available for sale securities are just that, ready to sell. If you see the fair value dropping, its your gamble if you hold out or sell. Mark to market can be more dismal looking on the books when the economy is spiraling, and people might not like the consequences, but there are different approaches to investing for each type of swing in the economy. If you make these risky investments and decide to hold them, you should not get upset when they become worthless. I think Mark to Market is more accurate with the value of a businesses investments when it comes to TS and AFS. If the economy was doing extremely well would everyone be upset with the ceilings on LCM, and feel that it was inaccurate? I dont think we should dismiss a method because it has negative effects in a recession. No method is going to be recession proof. The market varies in the amount that it varies, investing is always a gamble.

LCM is safer for the investor/business, but I dont think it is necessarily better or more accurate for the buyer or the stockholders of the business. By having the floor/ceiling you arent being completely honest about the true worth of the item.

Equity securites are a whole differnt monster. Because you are holding them for a longer period of time and because the market does vary, I dont think mark to market should be used. Also, if you have a significant influence, and can help sway when to declare dividends and issue stock and whatever, you kinda have an influence on the FV and can use that to your advantage when its time to do the statements. I dont think the same rules should apply.

Zoe said.

Replying to everyone: Mark to market did help with the recent wallstreet disaster, obvioulsly. But then shouldnt we learn from our mistakes and make wiser decisions. Companies at one time stock piled cash instead of stocks, now they invest. Maybe that isnt the way to go? Maybe there should be a healthy amount of tangible assets (not just your buildings and other realestate that you will stand to lose, but actual cold hard cash) along with all of your investments. No matter how safe the investment, its still a risk.

I believe the consensus is that there is not any one foolproof method of security valuation. MTM has a good argument in that recording liquid assets at cost does not show investors the true value of what is on the books. But in a bear market this leads to much larger losses, as the market drops tremendously, so does asset value. I believe corporations are going to use whatever method benefits them the most. I think everyone agrees that LCM is the safest and most conservative method. As an investor, you need to make sure you are well informed as to what method the company is using.

I think that marking trading securities can be a good or bad thing. Marking the value to market value gives a representation of what the securities are worth at that time. The downside is in a fluctuating market that can change in no time. So the security can be marked at a market high or low, but not really give an average representation of its value.

I think if the mark to market approach is used at year end, then equity securities should be valued the same way. Not to say that it is the better way, but that the method should be the same across the board.

I definitely think the market fluctuates way too much to use the mark to market approach. Although, the lower of cost or market rules seem even more conservative in representing the value of securities.

It really is hard to say what is the best way with such the economy being in such a bad state, should the company leave the securities at cost value or market value? Cost value may seem a bit high and market value could reflect a drastic loss, yet if the economy were to improve, then a gain would need to counteract the loss.

Zoe, I like your viewpoint on things. And youre right, if companies are willing to take risks, they should be able to take the fall that comes with that risk. And very true, no method is recession proof!

Chip Lamb said.

Well, after reading through the article I feel that the Mark-to-Market method of accounting for investments is not the proper way to go unless the investment is highly liquid, AKA publically traded stock and bonds. I would actually purpose a very different approach for those assets that are not super liquid. That idea is that both the Cost and LCM value be reported. In this age of computerized accounting setting up reporting for both methods would be roughly as easy as the current system of mark-to-market and this would give investors a much better idea of the value of the investments. As I mentioned though, I do like the idea of Mark-to-Market for publicly traded securities since these assets are very easy to assign a fair market value to, aka open up the Wall Street Journal. inside the companies that they own.

Chip Lamb said.

Zoe, I agree with your thought that companies should hold assets in cash more and investments less. Cash is king and its value and liquidity is never in question.

I believe that the Trading Security and Available for Sale Investments should be recorded using the mark-to-market approach because they are typically held short-term, so this approach would provide a more accurate rendering of their true worth. This method is not perfect, though, as the article showed. That os why I think that the equity securities should be listed at the lower of cost or market to avoid the constant market fluctuations that occur on a day to day basis, since equity securities are much more long term and day to day representations are not necessary.

I really enjoyed reading your comment Donna. I know you put a lot of time and effort into it and I learned a lot from it.

Well Done class! Thanks to Donna and Tonda for getting the discussion off to such a great start!

Here is my input. I like MTM for Trading and AFS securities as they are reported as investments on the balance sheet and the true value is the market value, not the cost since these are investements bought for resale either now or when management so chooses. Remember there is also a category of Held to Maturity securities that are not adjusted to market value.

Equity securities, as Zoe and Chip pointed out, are securities that show large owership interest (20 — 50%) and significant influence over the company. The reason these are not under the GAAP MTK rules is that as a major investor I can have a big impact on the market price by decisions I make within the company. That is why these types of investments are decreased for dividends and either increased or decreased for net income/loss percentages. This give a truer value.

Lower of Cost or market only shows permanent declines in value of an asset and records a loss that immediately affects the income statement. It does not allow you to report subsequent increases in value back up to cost one you have marked them down. not such a good thing with investments, as you all determined, flucutuate widely.

Obviously there are some who blame MKT for the current economic crisis. I am not one of them. I blame the companies who created debt securities sold as equities and then could not figure out how to value them when the economy went down. The SEC should regulate the types of serurities sold in the markets a bit more. and this is only my opinion