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Waseem Alim

Mark-to-Model is an accounting practice of valuing assets based on a mathematical model rather than the market price. In most cases, this is used for assets for which there is no active market. Level 3 assets are usually valued based on a financial model.

This is the exact opposite of the mark-to-market model, under which assets values are recorded at the last traded price on a public exchange.

The "model" in this case refers to financials models which, among other things, take into consideration the payout, the expiration date and the risk of the financial assets. In many cases the model has inputs which are subjective, and as a result has been criticized for providing an illusion value.

For example: a insurer may be providing a policy to oil refineries. Oil refiners thus pay the insurer periodic payments with the understanding that the insurer will pay back in the case of a major disaster, such as a hurricane. These contracts may not be traded publicly since they are highly specialized. Therefore, the insurers has no way to value these assets, expect for creating a model with expected payout, probability of disaster, premiums charged etc. In the insurer, nonetheless, has to report this asset (or liability) in its balance sheet and the value it puts on it is based on a model, rather than market values.