While it's hard to get anything like a unanimous answer to any question on fair-value accounting these days, the point that mark-to-market financial reporting applies best to marketable securities does get widespread agreement. What's less clear is how well fair value applies to products and services outside of the very limited sphere of securitization.
At yesterday's New York Society of Certified Public Accountants briefing on mark-to-market accounting, Stephen Penman, an eminent professor of accounting and valuation at Columbia—the "home of accounting fundamentalism," he noted, where the solons urge severe caution in the use of market pricing in the financials—made the point that fair value isn't very fair to manufacturers, retailers, or even the providers of basic mortgages.
To what extent, indeed, "is a market price fair value?" the professor asked.
Penman offered the example of the warranty liability for a dishwasher maker like Maytag. Under current standards, fair value is defined as the price Maytag could sell its warranty liabilities to someone else for. But Maytag, he argued, is in that business because it has a competitive advantage over other companies in servicing its warranties.
Maytag, in short, makes money by servicing washing-machine warranties at a lot cheaper rate than others can. "It's not really a question of what other people would do to service that business," Penman said, observing that the fair value of the service isn't the same thing as the market price. "It's what you can do in terms of serving customers as part of your whole business of developing customer goodwill and servicing."
Even in the case of providing mortgages, the knowledge that mortgage originators have relative to others should be part of the fair-value calculation, according to Penman. "The originators are out there on the spot when a customer runs into problems. They can work through the mortgage, try and get [distressed homeowners] to hold to maturity," he said. "They may in fact get a better estimate of the value of that mortgage to that institution—because they're a bank in a town where customers around the corner have a drink with you on Friday night—than what you could actually trade it for."
In short, true fair value, at least when it comes to such things as washing-machine warranties and plain-vanilla mortgages, may have a whole lot more to do with "It's a Wonderful Life" than with what a securities investor might pay for an item.
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