Another round of quarterly results have just poured in and investors are being confronted with a new worry on an item that is now regularly appearing on the profit and loss account of various companies, arising due to the mark to market derivative and other losses. These items have a tendency to disrupt the whole position of the company and hence it needs to be seen carefully.
A company adopts various positions with different instruments. In terms of accounting however, most of these will be reflected as cost. These instruments often mature after a long period of time. Hence their value will fluctuate in the intermediate period. Mark to market is a way of showing the intermediate valuation whereby the value is updated for the current position that it is in, reflecting its latest standing. This term is known as mark-to-market.
Such an exercise results in a major worry for companies and their executives. If the value of several of these instruments has fallen in the intermediate period then this has to be reflected in the exercise. This means that the loss will impact the profit and loss account and the performance can take a hit. This can cause an impact on the share price if the performance turns out to be worse than expected or if there is a sudden shock.
There are a number of ways that can lead to mark to market losses. One of the most common routes is through derivatives where the derivative products that are taken by the company have not turned out as per expectation. Due to a change in the position in the underlying markets the derivative value has changed and due to this there is a loss that is being witnessed. Apart from this there can be other positions too where there is a mark-to-market loss and each of these have to be considered separately to arrive at the total impact.
One time item
The most important act in the entire exercise is to see whether this loss is a one-time item or whether there is more to come. The investor will get a good idea of the overall position only when this exercise is complete. If this is a one-time item then the books can be cleaned up with the taking of a loss but if there is more to come then even future performance is at risk. This can turn out to be quite a problem as far as the investor is concerned because it is very difficult to get an idea about the actual position because information is not easily available publicly.