Generally Accepted Accounting Principles (GAAP) include a multitude of options for writing off balance sheet assets. All assets are eventually written off except for land. It’s the only asset viewed as having an “infinite” life.

For companies trading stock on a public stock exchange, assets are written off following accrual accounting through a process of expense or loss recognition. When and how much asset value is written off depends on the GAAP method followed. While the CPA auditing the company wields the final judgment call (or opinion) on whether a company has fairly presented its financial picture in accordance with GAAP, companies are generally allowed a pretty wide degree of latitude in GAAP compliance. That is, companies often more or less can pick and choose between GAAP options for asset write-off. For instance, there are many methods for depreciating property, plant and equipment assets and each one will lead to a different amount of depreciation taken in a given year. A company may select straight-line depreciation, for example, over a more accelerated write-down method. Now, the company does have to stay with the selected GAAP method over time for consistency but it does not have to select the same depreciation method as its peers select.

There are a few restrictions on wide-open freedom in selecting GAAP options for the expensing of assets, but very few. Of course, expenses go on the Income Statement (earnings report) and therefore are going to impact the bottom line (earnings per share). Thus, investors in common stocks are also impacted by a company’s GAAP selection process for expense recognition.

So, I need to know that when I’m comparing companies for their operating performance, GAAP has allowed for a degree of apples to oranges effect within the comparison. One company may be writing down A/R for uncollectible receivables different than the other. It may be writing off inventory to cost of goods sold differently (using LIFO while the other uses FIFO, for example). It may be depreciating using a different method than the other company, and so forth.

I often felt during my teaching career that accounting rule regulators should identify the one best method for writing off each balance sheet asset and require it across the board. But, then I would remember that I live in the real world where most decisions of financial consequence become politicized.

Have a good week.