What is Mark-to-Management?
How Does Mark-to-Management Work?
Mark-to-management is a method that tries to put a fair market value on an asset or liability based on the value it would have in normal market conditions. Assets and liabilities are marked-to-management according to the criteria established by company management, including historical market price patterns, financial models, or other reasonable valuation methods.
For example, a company might mark-to-management a bond it issued that has sustained a serious loss in value in a volatile bond market. The company may report the bond's price based on the company's own creditworthiness, the bond's historical performance, and any other favorable qualities that might raise the bond's value.
If the bond market is more volatile than normal, the mark-to-management value will be higher than the mark-to-market value. The mark-to-market value is the price the company could get right now if it had to buy or sell the bond. The mark-to-management value is the price the company would expect the bond to have in a 'normal' bond market.
Why Does Mark-to-Management Matter?
It is important not to confuse mark-to-management with mark-to-market, which is the practice of reporting an asset or liability based solely on its market price. The FASB allowed banks and brokerage houses to mark-to-management its poorly performing assets during the credit crisis of the late 2000s. It is very important that investors understand how a company values the items found on its balance sheet, because very large discrepancies can occur between the mark-to-market value and mark-to-management value.