Internal Control of Fixed Assets: A Controller and Auditor's Guide

CHAPTER FOUR 4

Depreciation and Amortization for Books and Taxes

THERE IS ONE OVERRIDING principle that a reader should take away from this chapter. Depreciation methods, amortization lives, fixed-asset lives, and salvage values can and probably should differ between financial reporting and taxes. The Internal Revenue Service (IRS) will review that each taxpayer has identified the specific tax accounting requirements for Property, Plant, and Equipment (PP&E) and that the regulations are followed. With regard to PP&E the IRS does not care what a taxpayer does for financial reporting. Only with LIFO (last in, first out) is there a requirement for conformity between book accounting and tax accounting.

Similarly, for financial reporting, how a taxpayer chooses lives, salvage values, and depreciation methods for taxes in no way needs to govern what the company does for its own financial statements. Auditors, reviewing internal controls, will assure themselves that the client is following its own written accounting policies; nothing in generally accepted accounting principles (GAAP) explicitly requires certain specific lives or depreciation methods, much less a single salvage value. As was shown in Chapter 3, current fixed-asset accounting software easily handles differing tax and financial reporting software.

In short, there need be no connection between tax accounting for PP&E and financial reporting of the same assets. As was mentioned in Chapter 2, many companies choose to use both ...