Mark-to-Market

[Frederick R. Ruffell]

I got an interesting flyer from the Southen California chapter of the appraisal institute offering a seminar about "Mark-to-Market". What is Mark-to Market? you and I both ask. Well the flyer gave a short explanation which I will share with you now.

Mark-to-Market is an accounting term that refers to marking an asset or liability down at its current "fair value" on a balance sheet. There is a movement withinin the accounting industry to change the reporting basis of assets and liabilities shown on balance sheets from the Historical Cost Basis to Fair Value. Under the Historical Cost system currently used by most accounting firms, the reported value of assets such as realestate is based on the historical acquisition cost. In contrast, Under the fair value method, a firms assets (including real estate) and liabilities would be marked to its current market value. In the accounting context Fair value is defined by the Financial Accounting Standards Board as "the price that would have been recieved or paid if it had been sold, exchanged, or setteled on the measure date." This definition is similar to Market Value used by appraisers.
Clearly this would have a profound change within the accounting industry, but what would it mean to Real estate appraisers?.....................

My question exactly. Potentially this could represent a very large volume of work. What Types of properties are we talking here? Is ther anything appraisers can do to help this change come about? Anybody going to this seminar?

 

[Dan Leggett]

It is a lot of the reason behind AVM's. Fannie, Freddie, and the rest need a super fast (who cares if it's accurate) way to value their portfolio.

 

[Oregon Doug]

Frederick - as far as I can determine, the mark-to-market program is yet another one of those clever programs touted by the AI that very likely will further erode its credibility. I seriously doubt that it will benefit appraisers much. I suspect that its net impact will be less work for commercial appraisers and more appraisal work for accountants.

as I see it.......Oregon Doug

 

[bradellis]

Fred, Dan and Doug,

For corporate inventories, FASB rules have long required that they be shown on balance sheets at the lower of cost or market. If you bought your widgets at $5 each, but could only sell them now at $4 each, $4 would be the "value" at which they are shown on the balance sheet, with a corresponding charge to income for the write-down. It is the conservative approach, and quite appropriate for accounting so as to ensure that statements are not over stated.

But, this concept is a very good idea, although fraught with some danger. It has been used in Australia for may years with good results, and I'm guessing in many other countries.

Before, if you bought a building for $1,000,000 in 1970, it would be carried on your books at acquisition cost less accrued depreciation. If you used maximum depreciation under current rules (31.5 years straight line), the improvements would be worth nothing! However, the reality is that the improvements may well have not been totally used up, AND the land may well have appreciated a great deal over the period.

This concept allows the firm to much more accurately report its assets. it is generally a good idea, and will certainly add work for a lot of appraisers- a good thing.

BUT, there will be a great deal of pressure on appraisers to provide the highest possible number to make the corporate assets look good. If the firm goes BK. I'll bet there will be a lot of lawsuits. Be very careful if and when you do this work.

Brad Ellis, IFA,RAA