In Praise of Mark to Management: The Need for Three-Dimensional Accounting

16 Pages Posted: 19 Jul 2009

See all articles by James Angel

James Angel

Georgetown University - Department of Finance

Date Written: July 16, 2009


There are frequent public debates over appropriate accounting standards. The political battle over fair value accounting is a case in point. For many of the 'toxic' assets at issue, there are material differences between the historic cost, the 'market' price, and management’s internal estimate of the value of the asset. There are advantages and disadvantages to each of these valuation conventions. Historic cost is easy to measure, but may drastically overstate the value of an impaired asset. The 'market' price, even in an 'active' market, may be more a reflection of a market panic or bubble rather than a best estimate of the intrinsic value of the security. Market prices may be efficient but they are not necessarily accurate. Indeed, it is ironic that the 'markets are perfect' meme has infected accounting policy just as academic researchers are coming to grips with the real imperfections of markets. Unfortunately, management estimates alone are no solution in times of bubbles and panics as such estimates are subject to manipulation. Focusing on only one of these numbers commits the statistical sin of throwing out useful information. A good statistician would use all of the available data points and weight them according to their precision. Alas, we do not usually have reliable estimates of the precision of various value estimates. However, this does not mean that we should throw out information that is very useful to the consumers of financial statements. Indeed, just knowing that the historical cost, and the 'market' price are different is extremely useful information to the investor regarding the outcomes of past management activities and sheds light on the precision of valuation. Similarly, seeing the difference between management’s reported value and other observations is also useful. Thus, investors are better served providing all of these values in an easily accessible format. We need to move towards three dimensional accounting that gives the users of financial statements easy access to all three dimensions of value: historic cost, market value, and model values. Traditional accounting anoints one of these dimensions and elevates it to the balance sheet, relegating the other dimensions, at best, to an obscure footnote disclosure. It is often a tedious manual process for a skilled analyst to adjust the reported numbers to take into account the information in the footnote. XBRL can give users of financial statements easy access to all three dimensions of value. With the proper tagging of balance sheet items, investors can easily choose whatever value dimension they want as well as examine differences between them. In this way investors can obtain the additional perspective that a three-dimensional view gives rather than one static dimension. With all of the information tagged in a computer-friendly manner, user-friendly software will make it simple for users to choose their preferred valuation metrics and adjust the information in any way they desire. They will be able to instantly compare companies using comparable decisions about appropriate accounting treatment of controversial items.

Keywords: fair value, FAS157, Mark to market, XBRL, market efficiency

JEL Classification: M41, G14, K23

Suggested Citation

Angel, James J., In Praise of Mark to Management: The Need for Three-Dimensional Accounting (July 16, 2009). Available at SSRN: or

James J. Angel (Contact Author)

Georgetown University - Department of Finance ( email )

McDonough School of Business
Washington, DC 20057
United States
202-687-3765 (Phone)
202-687-4031 (Fax)

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