6 Pages Posted: 2 Mar 2004
Most of the value of contemporary corporations does not appear on their balance sheets. If all assets were like a machine that turns out widgets, under GAAP the depreciation of the machine - which the manufacturer would have purchased from a third party - would be written off against the revenue from the widgets, producing GAAP earnings. But in the case of a software program for example, there is nothing on the balance sheet to be depreciated. Because there is no asset, there is no depreciation. When the costs of revenue-producing assets cannot be determined because the earning asset is internally produced by the company's employees and has no determinable cost, GAAP reports are useless or misleading.
Keywords: Enron, GAAP, Generally Accepted Accounting Principles, depreciation, asset, stock valuation, price/earnings ratio, cash flow projections, SEC, Securities and Exchange Commission, accounting practices, failure, success, financial indicators, performance indicators, intangibles
JEL Classification: G12, M21, M41
Suggested Citation: Suggested Citation