Inventory is carried at cost, which includes what it took to bring it to its present condition and location, using a cost-flow assumption such as FIFO or weighted average; LIFO is permitted under US GAAP and prohibited under IFRS. Inventory measured under FIFO or average cost is written down to the lower of cost and net realizable value, and a write-down is not reversed under GAAP. A periodic physical count, reconciled to the perpetual records with the shrink explained, is the control that keeps the number believable.
Source: FASB ASC 330 (IAS 2 prohibits LIFO)Last revised September 2026General information, not advice
2Goodwill and intangible assets, amortization and impairment, the private company alternative
Goodwill is the excess of the price paid for a business over the fair value of its identifiable net assets, and under GAAP it is not amortized but tested for impairment at least annually. A private company may instead elect to amortize it over ten years, or a shorter period it can justify, and then test it only when an event suggests impairment, which it may assess only at the reporting date (ASU 2014-02, ASU 2021-03); it may also fold certain customer-related intangibles and non-compete agreements into goodwill (ASU 2014-18). Intangibles with finite lives, such as customer relationships or developed technology, are amortized over those lives, and those with indefinite lives are not amortized but tested for impairment. Internally generated goodwill is never recorded; it exists only when a business is bought.
Source: FASB ASC 350; ASC 805 (business combinations); ASU 2014-02, 2014-18 and 2021-03 (private company alternatives)Last revised September 2026General information, not advice
3Contingencies under ASC 450: when to accrue a loss and when to disclose, lawsuits, guarantees
A loss contingency such as a lawsuit or a warranty claim is accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated; when only a range can be estimated, the best estimate within it, or the minimum if none is better, is accrued. A probable loss that cannot be estimated and a reasonably possible loss are disclosed rather than accrued, and a remote one generally needs neither. A guarantee is the exception: a guarantee of another party's debt, including an owner's or a sister company's, is disclosed even when the chance of paying is remote (ASC 460-10-50-4). Gain contingencies are not recognized until realized.
Source: FASB ASC 450-20 (450-20-25-2, 30-1, 50-3 to 50-5); ASC 460-10-50-4 (guarantees)Last revised September 2026General information, not advice
Income tax expense in GAAP statements is the current tax plus the change in deferred taxes, which arise from temporary differences between book and tax bases, such as depreciation methods or accrued expenses not yet deductible, and a deferred tax asset is reduced by a valuation allowance when it is more likely than not that some of it will not be realized. A tax position is recognized only if it is more likely than not to be sustained on examination, at the largest amount more than half likely to be realized (ASC 740-10-25-6, 30-7), and a pass-through entity's own status is such a position. A pass-through entity generally records no entity-level income tax because its owners pay it, but a state pass-through entity tax it elects to pay, which Arizona offers, is generally its own income tax under ASC 740, and other state-level taxes can still apply. For annual periods beginning after December 15, 2025, a private company also gives the expanded income tax disclosures of ASU 2023-09, including income taxes paid by jurisdiction. The books are the record a tax preparer works from; the return itself is a different profession's work.
Source: FASB ASC 740 (740-10-20, 25-6, 30-7); ASU 2023-09; IRS Notice 2020-75Last revised September 2026General information, not advice
5Accounting changes, corrections of errors and restatements
A change in accounting principle is applied retrospectively to prior periods presented; a change in an estimate, such as a useful life or an allowance rate, is applied prospectively. An error in previously issued statements is corrected by restating those statements, and a material one is disclosed as a restatement. The distinction between an estimate revised with new information and an error that should have been caught is where most of the judgement sits.
Source: FASB ASC 250Last revised September 2026General information, not advice
6Allowance for credit losses on receivables (CECL), bad debt reserve, allowance for doubtful accounts
Trade receivables carry an allowance for the credit losses expected over their life, estimated from the day they are recorded rather than when a customer is already late; older books call it the allowance for doubtful accounts or the bad debt reserve. A common method for a small company ages the receivables and applies historical loss rates by bucket, adjusted for current conditions and reasonable and supportable forecasts. For current receivables and contract assets from customer contracts, any company may instead assume the conditions at the balance sheet date continue for the rest of the asset's life, and a private company that does so may also take into account cash collected after the balance sheet date (ASU 2025-05, for annual periods beginning after December 15, 2025). The allowance is reviewed every close, and a specific balance known to be uncollectible is written off against it.
Source: FASB ASC 326-20; ASU 2025-05Last revised September 2026General information, not advice
7US GAAP versus IFRS: the headline differences
The two frameworks agree on far more than they differ, and revenue recognition is substantially converged, though not identical. The recurring differences: IFRS prohibits LIFO, permits reversal of impairments other than goodwill, capitalizes development costs that meet its criteria, uses a single lessee model, allows revaluation of property, and classifies some interest and dividends differently in the cash flow statement; from annual periods beginning on or after January 1, 2027, IFRS 18 also prescribes income-statement subtotals that US GAAP does not. A US private company usually reports under GAAP, or on a tax or cash basis where its lenders accept one, unless an owner or a lender abroad asks for IFRS.
Source: FASB ASC; IFRS as issued by the IASB, including IFRS 18Last revised September 2026General information, not advice
8Fair value measurement and the fair value hierarchy: level 1, level 2 and level 3 inputs, valuations
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date: an exit price from the market's point of view rather than the company's. The hierarchy ranks the inputs: level 1 is a quoted price for the identical item in an active market, level 2 is another observable input such as a quote for a similar item, and level 3 is an unobservable input the company develops, such as its own forecast in a valuation model. A measurement is categorized at the level of its lowest significant input, and level 3 measurements carry the most disclosure because a reader has the least means to check them. A private company meets fair value most often in acquisitions, equity awards, SAFEs and impairment tests, and a valuation specialist's report is evidence the company still has to understand and own.
Source: FASB ASC 820Last revised September 2026General information, not advice
9Guarantees: a company that guaranteed or is guaranteeing a bank loan, a personal guarantee, a sister company's or a related party's debt
A company that guarantees somebody else's debt recognizes a liability when it issues the guarantee, for its obligation to stand ready to pay, measured at fair value at inception (ASC 460-10-30-2); for a guarantee of a loan it also recognizes, separately and from inception, a liability for the credit losses it expects over the guarantee's term (ASC 326-20), while a loss on a guarantee outside that standard, such as a performance guarantee, is accrued when it is probable and can be reasonably estimated (ASC 450-20). Guarantees between a parent and its subsidiaries, in either direction, and between companies under common control, such as sister companies with the same owner, are excluded from the stand-ready liability (ASC 460-10-25-1), but not from disclosure. A guarantee is disclosed, with its term, the most the company could have to pay and what would trigger payment, even when the chance of paying is remote (ASC 460-10-50-4), and a guarantee given for or by a related party is a related-party disclosure as well (ASC 850). A guarantee is easy to forget because nothing is paid when it is given, so the agreements are listed with the loan documents and checked at every close.
A few questions on Other Standards and Estimates, drawn from the notes on this page, to check what stuck.
The assistant writes these questions from the reference notes on this page each time you ask. A generated question or answer can be wrong: check it against the standard the explanation names. General information, not advice.
Read this once
How to Read These Notes
General information, not advice.
A note is about accounting in general. It is not advice about your situation and it is not an engagement. When a number matters — a filing, a covenant, a sale — put it to a person.
Each note names its source.
Read the standard it cites before you act on it. “Last revised” is the month the note was last written or corrected against that source.
A note answers a general question. Your books answer the specific one — the first conversation is a look at them and an honest answer about whether we are the right firm.
