Question

You have been hired as Risk Consultant at a U.S.-based bank.
You have been hired as Risk Consultant at a U.S.-based bank.

The bank is currently reporting its financials using the book value accounting method. The bank is considering an international move in which it can switch to the market value accounting method.

You have been asked to write a 3-page report for the bank`s management. The report should discuss the following:

• What is the difference between book value accounting and market value accounting?
  • How do interest rate changes affect the value of bank assets and liabilities under the two methods? Provide an example that supports your position on this.
• What is marking to market?

Answer 1

In the books value method the asset or liability are recorded and carried in the books at the cost of acquisition. Whereas in market value method the asset or liabilities are initially recorded at coat of acquisition but later on updated at the market cost .

The difference in the book cost and market cost is recognised in profit and loss account .

The asset or liability in market value system are always updated at the market value , which is know as marked to market .

In book value accounting the bank asset or liabilities are recorded and the interest payable or receivable are recorded as and when they become due. However. In the market value system the asset or liabilities are update with interest income or expenses on regular basis.