Free Market Failure is Reaching Dangerous Level and How It Began

LOCOM – Lower of Cost or Market – is an accounting principle intended to require public corporations to properly represent their value in public disclosures. It doesn’t always work that way, though. 

Here is how it works: The value of an investment on the books of a corporation is entered at cost. It remains that amount until it is sold, except when the market value of the investment is lower than the cost of the investment. When that happens, the value of the asset must be written down to the market value with a compensating adjustment made to an equity or reserve account as a write off.

While this rule serves well when the value of an investment declines, it actually distorts a corporation’s value when the value of an investment is much greater than its cost.