Accounting and financial reporting

ACCRUAL

Recognising revenue when earned and expenses when incurred, regardless of when cash moves.

The basis of standard financial reporting, and the reason a profitable company can still run out of cash - profit and cash flow answer different questions.

AMORTIZE

To spread a cost or a debt over time - writing down an intangible asset across its useful life, or repaying a loan through instalments covering both interest and principal.

In an amortising loan the early payments are mostly interest; the share going to principal grows with each instalment.

CONTINUITY

The assumption in many pricing models that prices move smoothly rather than jumping.

Real prices gap, especially in stress, and hedges built on continuous movement fail exactly when they are needed. This is the gap between a model's tidy math and a market's behavior. ## Commodities and currencies

DEPLETION

The accounting method that spreads the cost of a natural resource over the units extracted, the way depreciation spreads the cost of equipment over its life.

It applies to mining, oil and gas, and timber. US tax rules also allow a percentage depletion method that can, over the life of a property, exceed the original cost.

DEPRECIATION

The accounting allocation of a tangible asset's cost across its useful life. Separately, a fall in a currency's value against others.

As an expense it reduces reported profit without any cash leaving the business, which is why cash flow statements add it back.

DRESSING

Window dressing, adjusting a portfolio near the end of a reporting period so the holdings look better in the report than they did during it.

A manager sells the quarter's losers and buys its winners before the snapshot date. The disclosed holdings then describe the report, not the decisions that produced the returns.

ESTIMATED

Estimated tax: quarterly prepayments of US federal income tax by people whose income is not subject to withholding.

The self-employed, retirees and investors with large capital gains use it. Underpaying triggers a penalty calculated as interest, which is why the safe-harbor rules based on last year's tax matter.

EXTENSION

Extra time the IRS grants to file a return, requested before the original deadline.

It extends the time to file, not the time to pay. Tax owed is still due on the original date, and interest runs from then regardless of the extension.

GOODWILL

The premium an acquirer pays for a business above the fair value of its identifiable net assets, recorded as an intangible asset.

Not amortised under US GAAP but tested for impairment. A large write-down is effectively an admission that an acquisition was overpaid for.

A buyer pays $500 million for a company. After subtracting liabilities, the company's identifiable assets (buildings, equipment, receivables, patents and customer lists) are worth $380 million at fair value. The remaining $120 million is goodwill, the part of the price paid for the business as a working operation. It stays on the balance sheet until an annual test finds it can no longer be recovered.

HARVESTING

Realising losses deliberately to offset taxable gains elsewhere, then reinvesting to maintain exposure - tax-loss harvesting.

US rules disallow the loss if a substantially identical security is repurchased within 30 days, which is what the wash-sale rule polices.

IMPAIRMENT

A write-down recognising that an asset's carrying value on the balance sheet exceeds what it can now recover.

Non-cash, but informative - a large goodwill impairment is an accounting admission that an acquisition did not deliver.

Take the same $120 million of goodwill. If the acquired business is later judged to be worth $60 million less than its carrying amount, the buyer writes off $60 million. No cash leaves the company, and the charge is usually excluded from adjusted earnings. The write-down still answers the question of whether the original price was too high, because the buyer has now said so in its own filings.

LAPSE

The expiry of spending authority when Congress has not enacted an appropriation, which is what triggers a shutdown.

The Antideficiency Act makes spending without an appropriation illegal, so a lapse forces agencies to stop rather than continue and settle up later.

MATCHING

The matching principle: expenses are recorded in the same period as the revenue they helped produce, rather than when cash moves.

This is why accrual accounting exists, and why profit and cash flow differ. Most accounting disputes are arguments about when something should be recognized.

PROVISION

An amount set aside in accounts for a liability that is probable but uncertain in timing or size - loan losses, warranties, litigation.

Provisioning involves judgement, so the level a bank sets is read as a signal of how it expects credit to perform.

QUICK

The quick ratio, or acid test: liquid assets divided by current liabilities, excluding inventory.

It asks whether a company could cover near-term obligations without selling inventory. A ratio below one is normal in businesses that collect cash before paying suppliers, such as restaurants and retailers.

RECONCILIATION

In the US Congress, a budget process that lets certain spending and tax bills pass the Senate with a simple majority and limited debate.

It also carries rules limiting what can be included, so major legislation often gets shaped around what survives them. In accounting, the same word means comparing two records until they agree.

REVENUE

The total value of goods and services a business sells in a period, before any costs are deducted. The top line.

Recognition timing is a recurring source of dispute: when a sale should be booked can shift reported growth between periods without changing the underlying business.

SOLVENCY

Whether an entity's assets exceed its liabilities - the capacity to meet obligations over the long run.

Distinct from liquidity. A solvent institution can still fail if it cannot raise cash quickly enough, which is the classic anatomy of a bank run.

STUFFING

Channel stuffing, shipping more product to distributors than they can sell in order to record revenue earlier.

It borrows from future sales, so revenue looks strong for a quarter or two before returns and slowing orders arrive. Rising receivables and inventory at distributors are the usual tell.