0

As an European finance/law student, I am currently studying the legal part of the stock taking process of fixed company assets in the United States.

Unfortunately, I could not figure out if there are any legal requirements to inventory fixed assets. In particular, I want to know if US company owners are legally required to inventory their company assets and if so, which inventory system they have to use (perpetual or periodic). Also, are there are any regulations regarding the stock taking process in the US GAAP?

1

Short Answer:

There is no U.S. rule or GAAP rule that mandates one particular stock taking process for fixed company assets. Any reasonable approach applied consistently is acceptable.

Long Answer:

The question doesn't generally present itself in quite the manner that you assume.

In the U.S., an accountant prepares financial statements for a company based upon information supplied by management (sometimes the accountant is in house, and sometimes not) and usually US GAAP will allow a company to conduct inventory accounting on one of several approaches so long as this is disclosed in the footnotes to the financial accounting statements (tax accounting in most circumstances will have more than one available choice of accounting method as well) although it must be applied consistently.

If the firm preparing the financial statements is publicly held, or simply needs to convince someone that the financial statements are accurate, they will retain a public accounting firm to audit the financial statements, and the auditor, consistent with standards applicable to auditing and their own company policies (there are only a small number of firms that do most auditing work and the top dozen firms probably have something like 95% of the market), will audit company information such an inventory counts in a manner that is reasonably calculated to locate material inaccuracies, but isn't necessarily dogmatically rigid or procedurally dictated.

Normally GAAP applies in practice with the force of law in a public offering or audited financial statement because (1) the relevant stock exchange usually requires it, (2) the SEC requires it for public offerings and publicly held companies, and (3) audited financial statements in other circumstances will almost always represent that they are prepared in accordance with GAAP except as expressly stated otherwise. Also, private offerings of significant dollar amounts of securities under exemptions to the securities laws often contractually require GAAP accounting, even though it wouldn't be legally required in that context but for the contractual requirement.

For the most part, US GAAP governs what the proper way to report transactions is, given that certain facts are true. It does not generally mandate how a business or accountant or auditor goes about the process of actually determining that those facts are true. Something like stock taking is more a matter of the craft and lore of the accounting profession based upon what was worked to gather those facts in a reliable manner rather than the exact method used, although the method of inventory accounting chosen will influence what facts must be gathered.

If the firm intends to use the audited financial statement for a public offering of securities (generally either stocks or bonds) under the 1933 Securities Act, the firm will generally hire a large law firm with a department specializing in public offerings to do "due diligence" to both confirm the accuracy of non-financial statement aspects of disclosures made in connection with the public offering and to assure itself of the adequacy of the audit of the financial statements and the reasonableness of the financial accounting options elected under the circumstances.

There are firm policies and industry standard practices as to what constitutes adequate due diligence, but little of this is formalized in statutes or regulations. Instead, it is mostly tested in securities fraud lawsuits brought by the SEC, or state securities regulators, or private law firms (usually in class action lawsuits), when notwithstanding due diligence and audited financial statements, a fraud is perpetrated anyway. If that happens and a jury or judge can be convinced that the auditing firm or the law firm handling the public offering failed to take reasonable care in conducting the audit and due diligence, then their professional malpractice policies will have to pay out and they could even go out of business (as Arthur Anderson did).

So, every decision on issues like how to take stock of inventory to the method that will be used to report it on financial statements is evaluated by the senior lawyers and public accountant auditors in offering based upon whether (1) doing so could look like an attempt to conceal information (in 20-20 hindsight) or (2) it could look like carelessness on the part of the lawyers or accountants made it possible for management to get away with fraud.

In the context of tax accounting, as opposed to financial accounting, which almost all firms are required to do, the tax code and Treasury Regulations tell you which inventory accounting methods are allowed for your kind of firm and the firm then has a duty to affirmatively take reasonable steps to maintain records sufficient to prepare an accurate tax return.

But, this generally would not involve any particular mandated procedure for stock taking. Instead, any reasonable method of taking stock under the facts and circumstances would be acceptable. However, if the company didn't do stock taking at all, or if it did it in a haphazard or inconsistent manner, it would probably fail a tax audit. In that case, the tax collection agency would modify the tax due based upon a revised return that used whatever the worst case scenario that would be possible in light of what they actually did to take stock.

| improve this answer | |
0

For what purpose?

Businesses are required to keep accounts for a myriad of different purposes: to inform their shareholders, to inform the market, to remit income taxes, to remit payroll taxes, to remit sales taxes, to pay creditors, to get payment from debtors and to inform management. The method of accounting for stock may be (and usually are) different for each purpose.

Specifically, US GAAP is not law - it is simply a requirement imposed by the US SEC as a requirement for listing on an exchange.

| improve this answer | |
  • Ok, thank you for your answer. Could you please add any references that support your answer? If I understood your answer correctly, US companies are not legally required to inventory fixed assets. It is just recommended for the different purposes you mentioned in your answer, is this correct? – Jane Doe Aug 12 '16 at 11:20
  • Of course they do - it's just that different methods may be applicable for different laws – Dale M Aug 12 '16 at 11:37
  • Notably, the US GAAP is devised by a trade association for accountants, not by legislators. – ohwilleke Dec 10 '16 at 9:23

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.