# How to Calculate MTM in Finance

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The way a company values its assets makes a big difference on its financial statements. Suppose an asset drops in value, for instance. A business balance sheet looks better if the business uses the "historic" value — for example, the original purchase price — rather than the current, lower value. Mark-to-market valuation, or MTM, in finance sets values for assets and liabilities based on the market.

## Use of Item's Exit Price

The Financial Accounting Standards Board (FASB) says the standard for marking to market is the item's exit price. That's the sale price for an asset or the transfer price if the company gets rid of a liability. For what FASB calls "Level One" assets, setting the exit price is easy.

Level One assets are widely traded and have visible market prices. If a stock trades actively on an exchange, for instance, the current sale price gives the exit price.

## FASB Level Two Items

Assets or liabilities that don't have obvious quoted exit prices fall into FASB's Level Two. To mark a Level Two item to market, the company accountants have to look for "proxies" such as similar assets or liabilities that are actively traded.

Active trading is measured by the difference between current asking and bidding prices for an item. If the spread is significant or nobody's making any bids, the market is inactive. In that case, the item may be Level Three.

## FASB Level Three Items

Level Three items are the toughest ones to mark to market. They include, for example, assets where there's no active trading or other "observable inputs" for setting the price.

FASB says the company can use MTM for Level Three by applying "unobservable" inputs. These represent the company's own estimates of what the market exit price would be. Using unobservable data isn't an option if the company can set a market price with reasonable effort.

## Mark-to-Market Calculation Considerations

When using MTM in the share market and general finance, some items require special treatment. If there are restrictions on the sale or use of an asset — a stock that can't be sold for a year, for instance — the company has to consider what effect those would have on the market price. Likewise, when a company transfers a liability, it has to consider the risk the obligation won't be paid off.

If the drop in value is temporary, FASB may allow the company to take that into account. If the decline is long and steep, FASB may not accept claims it's a temporary change.