Chapter 15 Mark to Market

1
Chapter 15 Mark to Market

• Understand advantages and disadvantages of
  historical cost.
• Identify factors that led to the emphasis on mark
  to market.
• Describe how the FASB has taken a mark to market
  approach to many situations.

2
Mark to Market Accounting

• Question best way to measure the future economic
  benefits of assets?
• Two schools of thought on valuation input and
  output.
• Related to income determination, Philips.
• Apply answers to three topics marketable
  securities, stock options, and derivatives.
• Two answers.

3
Answer 1 Historical Cost

• Traditional answer historical cost vs. mark to
  market
• Widespread support
• Advantages
• SoHC an absolute, a fact, the soul of
  accounting?

4
Answer 2 M to M

• Dis of historical cost, pro mm
• Wealth Effect Today
• Soan absolute or Once upon a time

5
FASB and M to M

• FASB favors market values
• In CF
• In SFASs
• Three issues marketable securities, stock
  options, and derivatives

6
Marketable Securities

• Perfect Issue?
• Issue financial assets as investments-HC or MV
• Congress and S L crisis typo, p. 318, insert (
  )
• Hot potato

7
Marketable Securities

• Politics
• Pro MV SEC
• Con MV bankers and insurance. Why..
• 1. Volatility
• 2. Troubled loans
• FASB vote
• 1992 vote 3 to 3!
• ?????

8
Marketable Securities

• SFAS 115, 1993, Securities
• Provisions
• held to maturity
• available for sale
• trading
• Concerns
• psyco-analytic accounting believe them?
• partial application
• Bottom line a success

9
Accounting for Stock Options

• Old Stock Options APB O 25
• New stock options
• AICPA, 7 of Big 8 add to agenda 1984.

10
Stock Options

• June, 1993 ED SFAS 123
• Black Scholes
• Book it as expense
• Politics Who?
• FASB DM June 8, 1994 not require s.o.

11
Stock Option

• SFAS No. 123, 1995
• Choice (1) Adopt fair value approach or
• (2) Disclose it in notes
• Victory then
• Now Stock Options expense it (ala IASB).

12
Derivatives

• What are they?
• Reaction to risk
• Huge market
• Highly leveraged
• Big Losses

13
Derivatives

• FASB Financial Instruments Project
• SFAS 105 (1990), 107 (1991), and 119 (1994)
  disclosure standards
• SFAS No. 133, (1998) derivatives are assets and
  liabilities use fair value (market value) for
  them
• Three purposes for hedges
• Poster child for complex accounting
• Concerns.

14
Comparisons of M to M

• Referred issues.
• Highly visible and controversial.
• Produce volatility.
• Varying degrees of success

15
Mark to Market

• Kings criticisms
• HC known and understood
• MtM distort ni
• Fair value not exact
• Conclusion