“Please explain the meaning of ‘mark-to-market'”
“If an investing company owns 10 shares of a listed stock purchased for $4 per share, that investment would be shown in the investing company’s balance sheet at cost, i.e. $40, assuming traditional rules that prevailed when I learnt accountancy (“lower of cost and market value”).
“If, however, that stock now trades at $6 per share, under “mark-to-market” rules it would be shown in today’s balance sheet at 10 x $6 = $60, thus including an unrealized gain of $20, inflating its earnings by that amount, even though the shares are still unsold. The company can legally pay a dividend out of that $20, even though it has not even sold the shares, let alone make a profit, and has not received any cash for them. [That is what “unrealized” means.]
“If the market in those shares is volatile the balance sheet value can go down, of course. But by then it is too late – they have already been overvalued in the accounts, and a cash dividend paid, effectively out of capital – which is illegal. You can see why mark-to-market was so popular when markets were rising spectacularly, and why it contributed to the crash when things turned.”
Hope that’s clear.