Which type of information below should not be maintained by the AIS in accounting for fixed assets

Fixed asset management can be complex, especially for global enterprises or companies with large inventories — like a car rental business or manufacturing multinational.

Small organizations may use spreadsheets or enterprise resource planning (ERP) tools for asset tracking. However, manual data entry is prone to error. It can also be a slow method for staying on top of fixed asset inventory, when fleets of vehicles are moved between locations or the technology is complex.

In her asset management blog, Watson IoT Content Director Sarah Dudley outlines a common scenario: “You have five vehicles. Maybe you have a notebook where you keep track of when each needs an oil change, new wiper blades or a new set of tires…Now you have 500 vehicles. You’re beginning to see the issues that start to arise. If only you had a database where you could easily track this information with no risk of it getting lost or misplaced. This is the purpose an asset management system serves.”

Asset tracking software and management solutions offer a reliable way to oversee fixed assets. Included are features like location tracking, work order processing and audit trails.

Asset management software

Smaller operations may benefit from a computerized maintenance management system (CMMS). The automation software assists with scheduling, management and reporting of maintenance activities. Features include handling workflows, resourcing and routing, operating and repair guidance, and reporting and auditing.

For large operations, an enterprise asset management system like IBM Maximo provides a central platform for managing all fixed assets. It integrates asset data from across the asset lifecycle: acquisition, operations, maintenance, depreciation and renewal or replacement.

With a complete view, organizations gain insight into their complex asset environments. They’re better informed to manage asset health. Features and workflows help them optimize management tasks and reduce downtime. Teams also have an enterprise view of safety and environmental controls, the better to address issues and risks.

IoT and AI

The Internet of Things (IoT) offers deep insights and enables greater control of fixed assets. IBM Watson IoT software, for example, correlates data from sensors and devices to provide timely visibility into asset health and performance. It enhances asset management by analyzing status, assessing value and risk, and anticipating failures.

AI uses machine learning to gauge asset status and enable predictive maintenance. The technology gathers asset data (from sensors, telemetry, work orders, even weather events) and uses algorithms to see patterns or trends and develop forecasting models. The information, coupled with predictive scoring, enables the system to prescribe preemptive tactics or strategies.

Blockchain

Blockchain is a secure, shared ledger that records every transaction in a business network. In terms of fixed asset tracking, the technology helps:

• Establish provenance of equipment and services across the asset supply chain
• Record safety-related transactions such as permits and incidents
• Provide an audit trail across the network
• Provide oversight into damage and warranty related claims

“A blockchain means that all the activities that have been performed on an asset are verified and create an accurate record for asset managers to use,” says IBM lead product architect Russell Bee in his asset management blog. “They use these records to analyze performance, risks and to make strategic decisions about their equipment as part of their planning cycles.”

What Are the Generally Accepted Accounting Principles (GAAP)?

Generally accepted accounting principles (GAAP) refer to a common set of accounting rules, standards, and procedures issued by the Financial Accounting Standards Board (FASB). Public companies in the U.S. must follow GAAP when their accountants compile their financial statements.

GAAP is guided by ten key tenets and is a rules-based set of standards. It is often compared with the International Financial Reporting Standards (IFRS), which is considered more of a principles-based standard. IFRS is a more international standard, and there have been recent efforts to transition GAAP reporting to IFRS.

Key Takeaways

• GAAP is the set of accounting rules set forth by the FASB that U.S. companies must follow when putting together financial statements.
• GAAP aims to improve the clarity, consistency, and comparability of the communication of financial information.
• GAAP may be contrasted with pro forma accounting, which is a non-GAAP financial reporting method.
• The ultimate goal of GAAP is to ensure a company's financial statements are complete, consistent, and comparable.
• GAAP is used mainly in the U.S., while most other jurisdictions use the IFRS standards.

GAAP

Understanding GAAP

GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted ways of recording and reporting accounting information. GAAP aims to improve the clarity, consistency, and comparability of the communication of financial information.

GAAP may be contrasted with pro forma accounting, which is a non-GAAP financial reporting method. Internationally, the equivalent to GAAP in the U.S. is referred to as International Financial Reporting Standards (IFRS). IFRS is currently used in 166 jurisdictions.

GAAP helps govern the world of accounting according to general rules and guidelines. It attempts to standardize and regulate the definitions, assumptions, and methods used in accounting across all industries. GAAP covers such topics as revenue recognition, balance sheet classification, and materiality.

The ultimate goal of GAAP is to ensure a company's financial statements are complete, consistent, and comparable. This makes it easier for investors to analyze and extract useful information from the company's financial statements, including trend data over a period of time. It also facilitates the comparison of financial information across different companies.

The 10 Key Principles of GAAP

There are 10 general concepts that lay out the main mission of GAAP.

1. Principle of Regularity

The accountant has adhered to GAAP rules and regulations as a standard.

2. Principle of Consistency

Accountants commit to applying the same standards throughout the reporting process, from one period to the next, to ensure financial comparability between periods. Accountants are expected to fully disclose and explain the reasons behind any changed or updated standards in the footnotes to the financial statements.

3. Principle of Sincerity

The accountant strives to provide an accurate and impartial depiction of a company’s financial situation.

4. Principle of Permanence of Methods

The procedures used in financial reporting should be consistent, allowing a comparison of the company's financial information.

5. Principle of Non-Compensation

Both negatives and positives should be reported with full transparency and without the expectation of debt compensation.

6. Principle of Prudence

This refers to emphasizing fact-based financial data representation that is not clouded by speculation.

7. Principle of Continuity

While valuing assets, it should be assumed the business will continue to operate.

8. Principle of Periodicity

Entries should be distributed across the appropriate periods of time. For example, revenue should be reported in its relevant accounting period.

9. Principle of Materiality

Accountants must strive to fully disclose all financial data and accounting information in financial reports.

10. Principle of Utmost Good Faith

Derived from the Latin phrase uberrimae fidei used within the insurance industry. It presupposes that parties remain honest in all transactions.

Compliance With GAAP

If a corporation's stock is publicly traded, its financial statements must adhere to rules established by the U.S. Securities and Exchange Commission (SEC). The SEC requires that publicly traded companies in the U.S. regularly file GAAP-compliant financial statements in order to remain publicly listed on the stock exchanges. GAAP compliance is ensured through an appropriate auditor's opinion, resulting from an external audit by a certified public accounting (CPA) firm.

Although it is not required for non-publicly traded companies, GAAP is viewed favorably by lenders and creditors. Most financial institutions will require annual GAAP-compliant financial statements as a part of their debt covenants when issuing business loans. As a result, most companies in the United States do follow GAAP.

If a financial statement is not prepared using GAAP, investors should be cautious. Without GAAP, comparing financial statements of different companies would be extremely difficult, even within the same industry, making an apples-to-apples comparison hard. Some companies may report both GAAP and non-GAAP measures when reporting their financial results. GAAP regulations require that non-GAAP measures be identified in financial statements and other public disclosures, such as press releases.

Selecting GAAP Principles

The hierarchy of GAAP is designed to improve financial reporting. It consists of a framework for selecting the principles that public accountants should use in preparing financial statements in line with U.S. GAAP. The hierarchy is broken down as follows:

1. Statements by the Financial Accounting Standards Board (FASB) and Accounting Research Bulletins and Accounting Principles Board opinions by the American Institute of Certified Public Accountants (AICPA)
2. FASB Technical Bulletins and AICPA Industry Audit and Accounting Guides and Statements of Position
3. AICPA Accounting Standards Executive Committee Practice Bulletins, positions of the FASB Emerging Issues Task Force (EITF), and topics discussed in Appendix D of EITF Abstracts
4. FASB implementation guides, AICPA Accounting Interpretations, AICPA Industry Audit, and Accounting Guides, Statements of Position not cleared by the FASB, and accounting practices that are widely accepted and followed

Accountants are directed to first consult sources at the top of the hierarchy and then proceed to lower levels only if there is no relevant pronouncement at a higher level. The FASB's Statement of Financial Accounting Standards No. 162 provides a detailed explanation of the hierarchy.

GAAP vs. IFRS

GAAP is focused on the accounting and financial reporting of U.S. companies. The Financial Accounting Standards Board (FASB), an independent nonprofit organization, is responsible for establishing these accounting and financial reporting standards. The international alternative to GAAP is the International Financial Reporting Standards (IFRS), set by the International Accounting Standards Board (IASB).

The IASB and the FASB have been working on the convergence of IFRS and GAAP since 2002. Due to the progress achieved in this partnership, the SEC, in 2007, removed the requirement for non-U.S. companies registered in America to reconcile their financial reports with GAAP if their accounts already complied with IFRS. This was a big achievement because prior to the ruling, non-U.S. companies trading on U.S. exchanges had to provide GAAP-compliant financial statements.

Some differences that still exist between both accounting rules include:

• LIFO Inventory: While GAAP allows companies to use the Last In First Out (LIFO) as an inventory cost method, it is prohibited under IFRS.
• Research and Development Costs: These costs are to be charged to expense as they are incurred under GAAP. Under IFRS, the costs can be capitalized and amortized over multiple periods if certain conditions are met.
• Reversing Write-Downs: GAAP specifies that the amount of write-down of an inventory or fixed asset cannot be reversed if the market value of the asset subsequently increases. The write-down can be reversed under IFRS.

As corporations increasingly need to navigate global markets and conduct operations worldwide, international standards are becoming increasingly popular at the expense of GAAP, even in the U.S. Almost all S&P 500 companies report at least one non-GAAP measure of earnings as of 2019.

Key Differences

There are some important differences in how accounting entries are treated in GAAP vs. IFRS. One major issue is the treatment of inventory. IFRS rules ban the use of last-in, first-out (LIFO) inventory accounting methods. GAAP rules allow for LIFO. Both systems allow for the first-in, first-out method (FIFO) and the weighted average-cost method. GAAP does not allow for inventory reversals, while IFRS permits them under certain conditions.

When a company holds investments such as shares, bonds, or derivatives on its balance sheet, it must account for them and their changes in value. Both GAAP and IFRS require investments to be segregated into discrete categories based on asset type. The main differences come in recognizing income or profits from an investment: under GAAP it's largely dependent on the legal form of the asset or contract; under IFRS the legal form is irrelevant and only depends on when cash flows are received.

Other differences appear in the treatment of extraordinary items and discontinued operations. In practice, since much of the world uses the IFRS standard, a convergence to IFRS could have advantages for international corporations and investors alike.

GAAP is only a set of standards. Although these principles work to improve the transparency in financial statements, they do not provide any guarantee that a company's financial statements are free from errors or omissions that are intended to mislead investors. There is plenty of room within GAAP for unscrupulous accountants to distort figures. So even when a company uses GAAP, you still need to scrutinize its financial statements.

Some Key Differences Between IFRS and GAAP

Where Are Generally Accepted Accounting Principles (GAAP) Used?

GAAP is a set of procedures and guidelines used by companies to prepare their financial statements and other accounting disclosures. The standards are prepared by the Financial Accounting Standards Board (FASB), which is an independent non-profit organization. The purpose of GAAP standards is to help ensure that the financial information provided to investors and regulators is accurate, reliable, and consistent with one another.

Why Is GAAP Important?

GAAP is important because it helps maintain trust in the financial markets. If not for GAAP, investors would be more reluctant to trust the information presented to them by companies because they would have less confidence in its integrity. Without that trust, we might see fewer transactions, potentially leading to higher transaction costs and a less robust economy. GAAP also helps investors analyze companies by making it easier to perform “apples to apples” comparisons between one company and another.

What Are Non-GAAP Measures?

Companies are still allowed to present certain figures without abiding by GAAP guidelines, provided that they clearly identify those figures as not conforming to GAAP. Companies sometimes do so when they believe that the GAAP rules are not flexible enough to capture certain nuances about their operations. In that situation, they might provide specially-designed non-GAAP metrics, in addition to the other disclosures required under GAAP. Investors should be skeptical about non-GAAP measures, however, as they can sometimes be used in a misleading manner.

What Is the Difference between IFRS and GAAP?

Conceptually, GAAP is more rules-based while IFRS is more guided by principles. GAAP is used mainly in the U.S. and IFRS is an international standard. The two standards treat inventories, investments, long-lived assets, extraordinary items, and discontinued operations, among others.