In real estate, when we are selling a property, we are selling it in the context of a particular market. This is why we go to great lengths to get our real estate records accurate and up to date. We also try to make sure our tax returns and credit reports are complete up to date.
Not so in accounting. A recent case is that a man went to his bank and asked to have a loan taken out. The bank said no. When the borrower then went to the bank’s attorney and told him the reason for the rejection was because the loan was not valued at fair value. When the attorney looked at the bank’s books he could see that the loan was not valued at fair value.
The difference between a loan and a credit card is the value of the card, not the amount. It could be a credit card or a debit card. So if you’re in an apartment that has a $50 bill and a $100 bill, it’s worth $50 and it’s a credit card. A card can only be worth $50 for a $50 bill.
The lender could have simply changed the value of the card, but they didnt. In fact, the lender could have re-categorized the amount as a credit card and then the lender wouldnt have had to change the total amount. But since the lender didnt do that, its fair to question the fairness of the loan.
The issue here is that you cannot really compare the amount of a debt to the total value of the debt, which is to say the total amount paid out. The lender could have re-categorized the amount under the total amount paid out, but then the lender didnt re-categorize the amount.
This is what the “fair value” process is about. The “fair value” is a concept that determines the total amount of an asset, the total amount paid out, then the total loan amount. The “fair value” is not a concept that can determine what the lender has to pay out (or even whether the lender has to pay out).
The process of updating your accounting records is very different from adjusting the total value of an asset. To do this, you have to know what the asset is worth, usually in terms of the terms of the loan. If the asset is a good piano, then you have to know the value of the piano before you can adjust the amount of the loan. If the asset is a car, then you must know the car value before you can adjust the amount of the loan.
The problem with this is that when you’re making an adjustment to a loan, you don’t really have any idea of what the asset was worth before you made the adjustment. So you have no way of knowing if the change was fair. If you have to pay extra for a car you don’t really own or a used piano you don’t really play, then the adjustment can’t be fair.
This is a common problem for people who buy a car on a loan with an annual interest rate. When you sell your loaned car you have to sell it at a lower price than the car you loaned it to you. And that’s not fair, either.
An interesting story from the past is that of John R. Phelan, an accountant who was at one point a partner at one of the largest accounting firms in the country. One day one of his partners asked him to help out with a big reorganization. The reorganization involved moving a few hundred thousand dollars back and forth between the partners that were responsible for the loan, among other things. Phelan was surprised to learn that the loan was fully taxable.