FAS 157 Mark to Market Accounting

Although FAS 157 Mark to Market Accounting is a new standard, the concepts and use of mark-to-market and fair value for financial assets goes back many years through the implementation of prior standards, namely:

  1. FAS 107, Disclosure about Fair Value of Financial Instruments;

  2. FAS 115, Accounting for Certain Investments in Debt and Equity Securities;

  3. FAS 133, Accounting for Derivative Instruments and Hedging Activities;

  4. FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets;

  5. FAS 156, Accounting for Servicing of Financial Assets; and

  6. FAS 159, the Fair Value Option for Financial Assets and Financial Liabilities.

There are primarily three areas of difference between FAS 157 Mark to Market Accounting and prior practice.

  1. The definition of fair value is new.
    1. Fair value is now defined to be an exit price rather than entry price.
  2. The assumptions and methods used to measure fair value are mostly new.
    1. As opposed to using reporting entity assumptions, we should now use market-participant assumptions.

    2. There is now a fair value hierarchy to distinguish and rank amongst observable and unobservable market inputs.

    3. The allowed valuation methodologies are consistent with market, income and cost approaches.
  3. The required disclosure regarding how fair value is measured has increased.
    1. The inputs (observable/unobservable) used to arrive at fair value, along with the effects on net income or changes in net assets, must be disclosed.
Get a historical perspective, best practices and the new FAS 157 standard by calling: 1-866-200-9012

Applying FAS 157 Mark to Market Accounting can be challenging in volatile and illiquid markets.  Rapid deterioration in asset classes can make market participants risk averse and cause illiquidity in otherwise liquid markets.  This will cause instruments previously classified as Level 1 to be almost instantaneously reclassified as Level 3 without well-established and reliable models.  Furthermore, the risks of many asset classes are obscured by complex securitizations and financial engineering, causing buyers to become shy while sellers are willing to unload at almost any price.  These conditions set the stage for a very challenging environment for establishing reliable assumptions and inputs.

DerivActiv’s expertise in Derivatives, Side Pocket Transactions, Mortgage-Backed Securities, Asset-Backed Securities Pass-Throughs, Mezzanine Debt, Convertibles, Distressed Securities, Collateralized Mortgage Obligations (CMO), Auction Rate Securities, Cash and Synthetic CDO & CDO² Tranches, Credit Linked Notes, Structured Investment Vehicles, Exotic OTC Options, Complex and Illiquid Securities, can assist you in overcoming these challenges.

Widespread use of Mark to Market Accounting

Mark to market accounting methodology primarily is used due to Section 475 of the IRS Taxation code.  Generally, this section provides that large financial center banks and broker dealers that choose mark to market treatment (most do) shall recognize gain or loss as if the financial instrument were sold for its fair market value on the last business day of the fiscal year.  As a practical matter, most big banks and broker dealers internally mark to market their entire book on a daily basis for profit and loss tracking and risk management.  Traders are very focused on their daily profit and loss, as it determines their bonus compensation and continued employment.  The extension of mark to market accounting to smaller capital market participants is therefore a natural diffusion of already well established practices.

DerivActiv has been tracking valuations for years on thousands of positions and billions of investments in numerous asset classes and financial products.  We are designed to see the market where it really trades. Our pricing sources are vetted and respected by auditors, clients, capital market participants, traders, and asset managers.  Our credit and risk exposure adjustments are derived from a risk management perspective.  We care every day about transparency in prices and valuations as if we were making our own buy/sell decisions. 



FAS 157 Accounting
FAS 157 Application
FAS 157 Definition of Fair Value
FAS 157 Derivatives
FAS 157 Disclosure
FAS 157 Disclosure Examples
FAS 157 Effective Date
FAS 157 Guidance
FAS 157 Implementation
FAS 157 Level 1
FAS 157 Mark to Market Accounting
FAS 157 Private Equity
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