Accounting measurement rules in the usa
assume that a business entity continues as a going concern. Accrual basis measurements
are persistent, and transactions and events-recognition guidelines rely heavily on
the actual matching concept. A regularity requirement insists on consistency of accounting
treatment of such as items within each sales period and from one time period to the
next. If alterations in practices or procedures happen, the changes and their effects should be
disclosed.Business combinations must be accounted for as a purchase. Goodwill is capitalized
as the difference between the fair value of the consideration given in the exchange and the
fair value of the underlying net assets acquired (including other intangibles). It is
reviewed for impairment annually and written off as well as expensed to earnings when it's
book value exceeds it's fair value. Proportional consolidation isn't practiced. Joint
ventures tend to be accounted for using the equity technique, as are investments nonconsolidated,
20 percent- in order to 50 percent-owned affiliated companies. Foreign currency translation
follows the requirements of SFAS No. 52, which relies on the foreign subsidiary’s
functional currency to determine translation methodology.
The United States relies on historical cost to value tangible and intangible assets.
Revaluations are permitted only after a business combination. Both accelerated and
straight-line depreciation methods are permissible. Estimated economic usefulness
determines depreciation and amortization periods. All research and development costs
are typically expensed as incurred, though there are special capitalization rules for
computer software costs.
LIFO, FIFO, and average cost methods are permissible and widely used for inventory
pricing. LIFO is popular because it can be used for federal income tax purposes.
However, if LIFO is used for tax purposes, it must also be used for financial reporting
purposes. Marketable securities are valued at market unless they are classified as heldto-
maturity and valued at historical cost.
When financial leases have been in substance the purchase of property, the need for the
property is capitalized and a related liability is booked. The costs of pensions
and other post-retirement benefits are accrued over the periods in which employees
earn their benefits, and unfunded obligations are reported as a liability. Contingent
losses/ liabilities are accrued when they are probable and the quantity can be reasonably
estimated. Income-smoothing methods are not allowed.Finally, there is the issue of deferred taxes, because (except for LIFO) financial
and tax reporting are distinct. Income taxes are accounted for using the liability
method. Deferred taxes are accrued for the tax effects of temporary differences
between financial as well as tax accounting methods, and therefore are measured based on the
future taxes rates that will apply whenever these items reverse. Comprehensive tax
allocation is required.
