Re:$3 Trillion in Forgotten Debt
by roenxi on Friday November 17, 2017 @07:34PM
(#15727103)
This isn't mixing debt and value. The core point is that if the business is taking on a debt we should have regard for what the debt is being spent on, and the principle is that taking on a debt shouldn't immediately reduce equity in a business because it should be balanced by an asset.
> You can be in more debt but overall have a more profitable enterprise, right?
Yes. But if the businesses are identical in every way (management, worker skill, etc, etc) then they should have identical earning potential. If they are different in a way that is profitable, that difference is an accounting asset.
It doesn't matter how similar the hypothetical sauna in the desert is to the profitable sauna, the better location will result in better profits.
> This again confuses me - the debt is a sure thing. You signed a contract, meaning you have to pay up no matter what.
No. Nothing about the future is certain. I don't even mean that in the pedantic philosophical way, it is a very practical concern. If, eg, my fictional ski resort was buried in an avalanche that the rent would be extinguished (in sane jurisdictions, anyhow). The business might also be limited liability and go bankrupt - same $0 loss worst case as the desert.
> there's a million ways you could mess up and make less money than you intended.
That is true of any asset. Risk is an accepted concept. Even 'risk free' assets are only risk free assuming the law doesn't change.
> If guessing the future value of productive assets was simple, then investors of all kinds would have a super easy job. So how could we possibly put the productive asset in the books with a straight face?
Because 'we' think it has value. It passes the 'someone with money is paying for it' test. Guessing values isn't easy, but at some point we do have to do it to compare options.
> Isn't that borderline fraud?
I'm not going to try and lawyer and account at the same time, but accounts books aren't some magical tome that is always right. Sometimes erroneous valuations make it into them. The accountants do the best they can.
There are no set of accounts so correct they can make things true. There are reasonable and unreasonable assumptions. "I think this lease is net-positive for equity" can be a reasonable assumption. In fact, it usually will be.
> You can be in more debt but overall have a more profitable enterprise, right?
Yes. But if the businesses are identical in every way (management, worker skill, etc, etc) then they should have identical earning potential. If they are different in a way that is profitable, that difference is an accounting asset.
It doesn't matter how similar the hypothetical sauna in the desert is to the profitable sauna, the better location will result in better profits.
> This again confuses me - the debt is a sure thing. You signed a contract, meaning you have to pay up no matter what.
No. Nothing about the future is certain. I don't even mean that in the pedantic philosophical way, it is a very practical concern. If, eg, my fictional ski resort was buried in an avalanche that the rent would be extinguished (in sane jurisdictions, anyhow). The business might also be limited liability and go bankrupt - same $0 loss worst case as the desert.
> there's a million ways you could mess up and make less money than you intended.
That is true of any asset. Risk is an accepted concept. Even 'risk free' assets are only risk free assuming the law doesn't change.
> If guessing the future value of productive assets was simple, then investors of all kinds would have a super easy job. So how could we possibly put the productive asset in the books with a straight face?
Because 'we' think it has value. It passes the 'someone with money is paying for it' test. Guessing values isn't easy, but at some point we do have to do it to compare options.
> Isn't that borderline fraud?
I'm not going to try and lawyer and account at the same time, but accounts books aren't some magical tome that is always right. Sometimes erroneous valuations make it into them. The accountants do the best they can.
There are no set of accounts so correct they can make things true. There are reasonable and unreasonable assumptions. "I think this lease is net-positive for equity" can be a reasonable assumption. In fact, it usually will be.