Mark-to-market accounting has its own advantages and disadvantages. Where the assets and liabilities are valued at their current market price, it increases the borrowing and the lending of the banks as they are able to value their securities at the market price against their usual and traditional method of valuing their securities at cost price or purchase price. The Banks or the respective person records the assets and securities in his books of accounts at the closing price of that day, month end or quarter end or year end (Amadeo, 2016). This enhances the valuation of the securities and helps in improving balance sheet figures because it will ultimately help in increasing the drawing or lending powers of the companies.
It is a phenomenon where companies have a liberty to value their securities like shares, debentures, deposits, and investments as per current prevailing market prices. For example, in case a company has invested in shares at $ 10 per share on 01st January 2017. Now on year end that is 30th June 2017, the company if follows mark-to-market policy shall record the shares at a day and market price of the shares. For example, we assume the market price of the share to be $15 per share. So now the security shall be recorded at $ 15 per share in the books of accounts and not at $ 10 per share. The excess $ 5 per share shall be treated as mark-to-market gain and the company shall be able to borrow a higher amount by pledging those shares which may further be used for diversification or expansion of business (Duff, 2010).
There are a number of advantages and disadvantages or risk factors associated with mark-to-market accounting.
This method provides a better and a realistic method of recording and valuation of securities. Further, it is a more appropriate and modern day technique which aims at a correct picture of the investments made by the company. In case of a decline in the market, mark-to-market policy also reduces the value of the securities which may also be below the cost of acquisition of the securities (Lamoreaux, 2009). For example- in case of deflation a share purchased originally at $ 10 per share may be marked down to its actual realizable value of $ 8 per share and accordingly, a $ 2 marked down loss shall be recorded in the books of accounts. This is one of the most innovative ideas of showing investments as per their current realizable value which holds good in both inflationary or deflationary market situations (Deegan, 2013). It corrects the value of the security as per the market norms which may be prevalent at that time.
Mark-to-market policy often assumes market situations as inflationary or deflationary which might not be correct as per industry. It might also be an individual or group of individual observation of the market which actually may be artificial. This policy creates unrealizable gains or losses in the books of accounts and presents a picture to its stakeholders which might not be correct or different from the actual position and can also mislead the stakeholders to assume something which is actually not correct or viable (Deegan, 2013). Sometimes, there might be a global financial crisis like the one in 2008, which may force other countries to book decline in their investments. This might not have an effect on other economies as this may be a temporary decline but due to a global decline, the companies across the globe will be forced to decline or decrease the valuation of their assets and investments.
In case of low crude oil production or war like situation in the Middle East countries like UAE, Sharjah, and Dubai, there might be sudden jump in prices of crude oil and the purchase price may shoot up which may have sudden demand of gold and dollars which may have an inflationary effect which is temporary in nature but it will have an adverse effect on prices of securities across every country as demand for crude oil is universal. It decreases the paper profits of the companies which in turn results in a decrease in credit worthiness and thus limiting their borrowing capacity (Lamoreaux, 2009). This may further lead them to insolvency although there was no decline in the operating cash flows.
Conclusion:
It can be concluded that although it is a good option to show the assets and liabilities at their current market prices as it shows the actual financial strength and weaknesses. But at the same time, the assets which were being shown at their historical costs may have a huge change in their values if this method is all of a sudden implemented, thus creating a misinterpretation that the accounts have been manipulated (Amadeo, 2016). Hence, like any other system, this accounting system should be implemented with gradual changes. Hence, keeping in mind the sub-prime crisis of 2008 in mind, it was necessary for the financial institutions to record the assets and liabilities at their correct values and not inflated ones as this inflated value has led to the over leveraged figures of assets of the borrowers as well as their capacities to borrow from the financial institutions.
Hence concluded that the mark-to-market method of accounting has its own benefits and risks involved which should be well studied before its implementation.
The fundamental principles in corporate governance endeavor to obtain the basic regulations of accountability, transparency along with the basic rights of the investors and shareholders in a company. As and when companies grow in size and business operations in the company are increased substantially to enable it to increase its entry in to global market, nonetheless at the same time it becomes prone to risks arising out of uncertainties in operations in different countries that requires to increase in the responsibility to meet the principle of corporate social responsibilities and accordingly to meet the global reporting or else it can damage the credibility arises out of various litigations thereby creating substantial losses in the company.
Human rights, Environmental issues, and Corruption are the larger issues with respect to corporate governance. A sustainability report points out as the organization report based on the Environmental, Economic sustainability and governance in the company. Global Reporting Initiative (GRI) is one of the earliest International Independent Organization has been formed to consider the issues relating to Human rights, Corruptions, and Environmental issues. Climate being the larger issue affecting the environment, the organization was contemplated to derive the Corporate and Governments to make them understand and communicate and realize the adverse impact of the issues in corporate sustainability (Druckman, 2013). Globally as of 2015, around 7500 organizations are being reported to execute the GRI guidelines in their sustainability report.
A unique mode of operation in GRI guideline method has totally indifferent to the structure seen in Environment agencies, Government Monitoring Agencies, and Agencies in the private that are involved with the issues. After all the Eminent Persons and Scholars world over are involved with the issue, transparency and credibility in the sustainability report that has been derived and stored for the corporate reforms (Slaper et. al, 2011). As in the GRI guidelines, there is more subjective topics are elaborated, whereas Guidelines needs larger and definitive aspects to be incorporated allowing the further scope of improvement to the outcome in the sustainability reports of the corporate globally (IR, 2016).
GRI guidelines are being implemented by many Organizations and corporations throughout the world to maintain ethical practices in the organization for the sake of their investors, stake holders and the public at large. As the GRI guideline spells out observation report and indicators in the sustainability report are into different categories, though the references are complicated still appreciated by many in the reporting affiliation (Eccles & Krzus, 2010). Nonetheless, there are scholars raised few concern by their intervention and put better suggestions in making the reforms meaningful and effective. Organizations are fixing the accountability through the sustainability report in recent years.
Due to climate change resulting in radical effects soon because of emission of CO2, there have been contradictions on the reporting regarding measures taken by the manufacturing and processing activities of the company. The GRI guideline is one of the effective methods that involve the third party to quantify the environmental impact to the organization and the parties involved (Slaper et. al, 2011). The latest measures released by GRI include 30 Environmental indicators. The performance index is the measure consisting of Energy, Biodiversity, and Emissions. Both the indicator group forms the GRI indicator protocol that sets the standard of transparency of an organization. The Environment, Social, and Governance (ESG) criteria are the other measures that mentioned as the derivative for the final mention in GRI guidelines with a strong reference with an intention to allow the company to perform better with the set of parameters laid down in the guidelines (Nzuve, 2011).
Subject Sustainability in education provides in-depth knowledge for the student about sustainability issues relating to the organization. By providing transformative learning to improve knowledge to debate the challenging matters about sustainability issues. Basic concepts and motivation for management accounting and reporting is the need of the hour so that it becomes easier to discuss the relationship of sustainability to financial accounting and to carry out the concept into management and cost accounting courses (Sustainability reporting, 2012). Several case studies could be incorporated into the financial accounting class to deal with method and system to record, analyze, report environmental and economic issues that comprise the depth of sustainability.
Sustainability accounting has emerged from accounting theories over a period. The basic purpose of teaching sustainability during the first year of the course is to instill within the students the thinking capability to solve problems relating to traditional theory as well as day to day activities (Cairns, 2000). Basically, the presentation of accounts is done according to the management and external parties in three ways. Disclosure of the financial information gathered through internal sources for presentation to the external stakeholder is the foremost requirement. Secondly, the information on accounting is required for planning, control and management decision-making. The information on accounting is also required for presentation in the annual reports of the company (Melville, 2013). When such information has required the need for sustainability in accounting is developed. Thus a system is developed which is sustainable enough to modify the financial, cost or management accounting. In today’s world, the sustainable accounting involves not only dealing with figures but also reporting which emphasizes on accounting on communities, issues of effectiveness and efficiency, consideration on eco-justice, accounting on ecosystems (Sustainability reporting, 2012). Sustainability accounting focuses mainly on economic, social and environmental aspects of organizational activities.
Conclusion:
Sustainability accounts mainly focus on its three dimensions i.e. social, environmental and economic issues. It is basically a systemized way of recording, reporting and analyzing financial impacts on environment and society, social impacts of defined eco systems. KMPG (2016) considers the corporate sustainability accounting as a challenge because of the carrying capacities of the eco system and the need to address the entity concept. They are of the view that the accounting of sustainable organization is not known because it is not possible to define what a sustainable organization would look like. Hence it is first important to understand what a sustainable organization would look like. Then only accounting methods could be developed for sustainable accounting and reporting.
References:
Amadeo, K 2016, Mark to Market Accounting: How It Works, viewed 7 September 2017 https://www.thebalance.com/mark-to-market-accounting-how-it-works-3305942
Cairns, R. D. 2000, ‘Sustainability accounting and green accounting’, Environment and
Deegan 2013, Financial Accounting theory, 4th edn, McGraw Hill, Crows Nest.
Development Economics, vol. 5, no. 1, pp. 49-54.
Druckman, P 2013, Integrate reporting framework aims to promote lasting sustainable change, viewed 7 September 2017 https://www.theguardian.com/sustainable-business/blog/integrated-reporting-framework-sustainable-change
Duff, V 2010, What Are the Advantages & Disadvantages of Being Able to Mark to Market?, viewed 7 September 2017 https://smallbusiness.chron.com/advantages-disadvantages-being-able-mark-market-11369.html
Eccles, R.G. & Krzus, M 2010, One Report: Integrated Reporting for a Sustainable Strategy, Wiley, New Jersey, USA.
Integrated reporting (IR) 2016, What? The tool for better reporting, viewed 7 September 2017, https://integratedreporting.org/what-the-tool-for-better-reporting/
KMPG 2016, Performance insight through Better Business Reporting, viewed 7 September 2017, https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/road-to-integrated-reporting.pdf
Lamoreaux, M.G 2009, FASB Approves New Mark-to-Market Guidance, viewed 7 September 2017 https://www.journalofaccountancy.com/news/2009/apr/20091601.html
Melville, A 2013, International Financial Reporting – A Practical Guide, 4th edition, Pearson, Education Limited, UK
Nzuve. S, 2011, Some Thoughts of How to Allocate Indirect Costs in a Corporate Environment, School of Business, University of Nairobi.
Slaper, T. F., & Hall, T. J. 2011, ‘The Triple Bottom Line: What Is It and How Does It Work? Indiana Business Review. vol. 86, no. 1, pp. 6-10.
Sustainability reporting 2012, Using sustainability to drive business innovation and growth, viewed 7 September 2017 <https://www.deloitte.com/view/en_IN/in/index.htm>.
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