Accounting is the language of the business. The main purpose of accounting is passing any relevant information related to the financial performance of the company to various users such as investors, creditors, management, and government agencies. Such information is necessary to make rational decisions regarding the investments, credit, and timing of cash receipts or resources of the company and other.
In order to present fairly, and completely company’s financial operation accounting must comply with detailed standards and procedures such as GAAP. Generally accepted accounting principles are the framework of guidelines for financial accounting. The principles include the standards, conventions, and rules that accountants follow in the preparation of financial statements. GAAP policies relate to financial operations and they provide uniform criteria for communicating data.
In my earlier posts I started describing accounting as a discipline which goes way beyond just tax preparation. I will not describe GAAP here but I would like to emphasize the importance of GAAP in relation to fixed assets in attempt to point another very important area of accounting.
According to GAAP Companies must allocate the cost of depreciable assets to expenses over certain time (useful life of the assets). However the tax laws are different than GAAP rules. The biggest fixed assets difference between GAP and IRS is the timing when calculating the depreciation.
According to GAAP for book purposes, the company may use straight-line depreciation, while for tax purposes, it may use a more accelerated method, such as Modified Accelerated Cost Recovery System (MACRS). That is why the company has to maintain two different sets of records. I had an opportunity to work with fixed assets at one of the local mining companies. I was truly surprised when I found out that the company had 7 different books each with applicable depreciation methods for various reporting agencies and purposes.
At some point of my career I was involved in the acquisition of another company and huge batch of fixed assets uphold to the company’s current ERP system. That was truly challenging task to balance each book however once completed it was very rewarding experience. Overall I always thought that property, plant and equipment required one of the higher level of the accounting knowledge but once you dive into it becomes easier as you keep learning new things about PPA and various standards and regulations.
Very often I hear comments regarding fixed assets from other accountants who say that this is very ‘messy’ area of the company. Yes, indeed fixed assets management requires discipline and following very complicated rules. Such rules involve asset acquisitions, improvements, transfers, disposals, depreciation. Any extraordinary activities of the company such as acquisition of new company or fixed assets revaluations need to be carefully implemented since we can assume that those activities will be reviewed in smallest details by the auditors.
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