Meaning
Reductions applied to the borrowing base of a company following a physical inspection and audit of its collateral assets. Financial institutions use field exam markdowns to correct discrepancies between the reported value of inventory and its actual liquidation value. These adjustments often stem from findings of damaged goods, obsolete stock or incorrect counting methods discovered during a site visit.
The exam ensures that the lender has an accurate view of the security supporting the loan.
Asset Verification
Auditors visit the warehouse or factory to perform test counts and inspect the physical condition of the materials. When they find items that are no longer saleable, they apply field exam markdowns to remove those items from the eligible collateral list. This process includes checking for items that have been on the shelves longer than the industry standard.
The goal is to verify that every dollar of reported inventory is backed by a physical asset of equal or greater value.
Valuation Adjustment
Pricing records are compared against current market indices to ensure the inventory is not overvalued. If the market price for a specific metal has dropped since the last report, field exam markdowns align the collateral value with the new reality. This also applies to work in progress that may not be easily finished or sold in a liquidation scenario.
Lenders prefer a conservative valuation to ensure they can recover their funds if the borrower defaults.
Collateral Protection
Regular inspections prevent the accumulation of phantom inventory on the balance sheet of the borrower. These field exam markdowns serve as a corrective measure that forces the company to maintain tighter internal controls. A significant reduction in the borrowing base can lead to a liquidity crunch for the business.
Companies that manage their stock levels effectively and perform their own internal audits usually face fewer adjustments during the bank’s visit.
