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Up to date on: 29.1.2008
Provided by: Hungarian Patent Office
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US-GAAP (United States Generally Accepted Accounting Principles)

In the United States, generally accepted accounting principles are accounting rules used to prepare, present, and report financial statements for a wide variety of entities.  Companies that are willing to quote their shares in US stock exchange markets must follow these valuation- and presentation principles. This is mainly in the interest of big internationally acting corporations as they can enter the biggest market for equity worldwide.

When valuing assets on the balance sheet, there are only little differences between European (IFRS) and US reports. According to US-GAAP, assets may not be valued higher than the historical cost at the time of the acquisition of the assets (historical cost principle). But the value of the stock is to be calculated including the appropriate parts of structure costs for warehousing and the buying department, for manufacturing overheads as well as the appropriate pads of depreciation and interest and special direct costs of manufacturing (full cost principle).

The Income statement (profit and loss statement) has to be structured following the cost of sales method but there are no more detailed prescriptions. Where as in the usual continental European structure of a pal statement, where the different expense-types are deducted from sales, in US-GAAP a rough cost centre grouping is the standard. From revenue, the costs of goods sold are deducted which results in the gross margin. These costs of goods sold are the full costs of the whole works (defined as one big cost centre), but only after respecting the changes in the value of half-finished and finished goods, as well as work in process. Then the cost for research & distribution, marketing and sales cost and administration have to be subtracted from gross margin to arrive at the profit before taxes.

As far the income statement does not show all the important information additional insight have to be given in the notes.

Also part of the income statement is information about earnings per share (EPS) and the development of the equity. 'This is to be done under the income statement or in an extra statement of retained earnings.

Additionally, following US-GAAP, a statement of cash flow - a statement of changes in financial position - is part of the annual report. In this statement cash flows are divided in three positions:

  • Cash flow from operations
  • Cash flow from investment and disinvestments
  • Cash flow from financial activities.

Following the accrual principle, companies working with long-range orders (duration more than one year), may also show the respective part of revenues in the income statement which leads to higher results in periods when the order is not finished yet. This is the percent of completion method.

FAS 141 & 142

Before the introduction of FAS 141 and FAS 142 in the US GAAP, goodwill was the only vocabulary used by the accounting profession to speak about IP.  These important steps towards the recognition of IP mean that companies now have the possibility to discern the assets lumped together under "goodwill", including IP and value them separately. Companies need now to review, on an annual basis, the acquired IP and conduct an `impairment test'.

These recent regulatory changes have already had a significant impact on current market practices. For example, in Germany, they have created high demand for the valuation of brands. Since German companies registered in the US (notably most DAX listed firms) can make their income statement under US GAAP, incentives have been strong to report adequately valued trademarks on the balance sheet.

These modifications may be considered as important first steps towards a true and fair appreciation of IP, but further adaptations will be necessary to adequately reflect IP on the balance sheet.   Under FAS 141 and FAS 142, IP can be accounted for if it qualifies as intangible assets. Much of the IP held in a company will, however, hardly pass that test.

In the US-GAAP, internally generated IP is treated as an immediate expense. The same applies to Research and Development (R&D) related to the creation of IP. This means that the balance sheet offers distorted information on how IP is made. The costs incurred for the creation of IP are reported at one single point in time, while the IP is accounted for only in the context of a commercial transaction. However, this approach is not exclusively reserved for IP, but reflects the general way in which the accounting profession approaches a business.

Unlike internally generated IP, acquired IP is reflected on the balance sheet; for example, according to US GAAP, IP is valued at its acquisition cost and amortized over a maximum period of 40 years. However, this may lead to serious confusion; whereas internally generated IP is considered to be worth nothing, the IP that change hands may be worth hundreds of millions of Dollars. Thus, a company which decides to sell or license internally generated IP appears to create profits virtually out of nothing, as the IP that generated these profits does not appear on its balance sheet.

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