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3. Current Market Value
Under a current market (or mark-to-market) valuation,
entries are made to record the market value of the swap on the
balance sheet at each financial reporting date. Changes in
market value are reflected in income or loss, as are cashflows.
Because the sum of changes in market value over the life of the
swap must be zero, the income over the life of the swap again
equals total cashflow.
4. Lower of Cost or Market
Entries under the lower of cost or market generally follow
the entries made under the amortized cost method, with the added
step that, at each financial reporting date, the swap’s amortized
cost value (if any) is compared with its market value. If
current market value is below the amortized cost value, an entry
is made to adjust the recorded value to an amount equal to the
market value. All adjustments to or from market value are
treated as income or loss. The lower of cost or market method
recognizes losses in market value below the amortized cost value,
and gains to the extent that they recoup previously recognized
losses. The lower of cost or market does not recognize gains in
market value above the amortized cost value.
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