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Comment by Volpe | Hacker News Reader

Could you expand on that?

From my point of view, it's money in vs money out... I'm not sure how "creative" you can get before you are "lying".

It's been a while sine I felt comfortable discussing the details of accounting, but sometimes the need to classify things gets in the way of the truth. Do you capitalize a cost or expense it? Often you can argeue both sides of the coin, but ultimately, you're forced to choose.

The quantitative nature of accounting masks a nuanced and imprecise language meant to help communicate the overall financial story of a company. It's not like physics where there is a right and wrong answer.

You could use "creative" methods of describing and classifying transactions that aid in telling an accurate story (as defined by who?). You can also twist the truth. But there is no set of rules you can universally follow that will result in The Answer.

Upvoted.

While financial accounting (statements for shareholders, taxes etc) is governed by GAAP and meant to be as standardized across orgs as possible, managerial accounting (internal statements for the purpose of decision making) require a lot more decision making about how you measure things in the interest of providing the most accurate financial picture of the decision at hand.

I am very rusty so anyone who has some real experience in accounting, please correct me. That said, consider a simple example: a manufacturer which sells two types of windows and creates the glass which is used in them.

Line A of windows is selling at lower than expected prices and in financial accounting terms it is loosing money. On the other hand, line B is selling well and appears profitable. With this in mind, the company kills line A expecting to increase their profitability by the amount the line was previously loosing. Unfortunately, the subsequent decrease in the amount of glass the organization is producing reduces the scale of their glass making operation and drives up their per-pane cost. At these higher input costs, line B is no longer profitable at it's current selling price and the company looses even more money than they would have had they continued to run the "unprofitable" line A.

Of course, any competent management team would be able to forecast this scenario and devise a host of other solutions (sell glass to a competitor, for example). But the question here is: how should they present this reality in financial accounting? Decrease the recorded cost of glass used in line A? Add some sort of subsidy from the profits of line A?

All of a sudden it becomes extremely "creative".

How much is your car worth?

    * What you originally bought it for?
    * What you could buy that exact model year for today? From whom?
    * What you could buy a similar car for today?
    * What you could sell it for? To whom? In how much time?

And that's for something as tangible as a car, listed on the market with easily searched prices. This is a simple example, but I recall that some types of assets (land?) are valued at their original purchase price, which is far deflated from the current market value.

I think of accounting similar to benchmark tools for software -- it's all about what you want to measure, and depending on assumptions you have some wiggle room.

Good points but I think the answer is to pick one (I'd vote #4 but I'm open to debate) and enforce it at a regulatory level. Issues arise when you're allowed to change how you value assets based on what's most favorable at the time.

Ah... but if you do that, you'll be forcing companies to pick an arbitrary measure, regardless of how well it describes the underlying economics. The goal of accounting is description, not conformance.

As a practical matter, this would require the enforcement agency to publish the correct price for every asset regulated.

Publishing a formula for this calculation wouldn't be good enough, because then you would be required to value things based on the formula and that leads you back to...accounting.

Think about assets. What is the worth of your car, your house, your furniture, etc.? E.g. the car cost 20k initially, after two years of use, you discount 20%, so you put 16k into your books. Is that objective? Essentially, you have to predict the money-out and there is happing a lot between money-in and money-out.

I think their point is that you don't put the car on the books as worth anything. Instead you declare you own it and someone else can decide what they think it is worth. Anything that requires interpretation would be up for discussion.

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