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Like most highly skilled professionals, number crunchers speak a language all their own, tossing out terminology that can leave even a business-savvy executive scratching his or her head in confusion. What follows is a glossary of some popular accounting terms:
? Generally accepted accounting principles (GAAP): Broad guidelines and detailed procedures set forth by the Financial Accounting Standards Board and adhered to by publicly traded companies. GAAP has been criticized for being vague, full of ill-defined terminology, and ill-suited to an economy increasingly driven by technology and deal-making.
? Financial Accounting Standards Board: Industry body chartered by the Securities and Exchange Commission that created and updates GAAP.
? In-process R & D; charge: A lump-sum write-down taken at the time of an acquisition, equal to the estimated future value of research and development projects at the acquired company. Enables acquiring company to obfuscate the premium it paid for its acquisition, in excess of book value. Also, separates R & D; expenses from any potential future earnings resulting from that R & D;, thereby boosting future earnings.
? Goodwill: Accounting term for the premium paid for a business or asset above the value recorded on the books. Posted as an "intangible asset."
? Intangible asset: A right or non-physical resource presumed to represent an advantage to the company's position in the marketplace. Examples include the knowledge of highly skilled workers, licenses, patents and permits. A gray area under GAAP because some such assets are not measured at all, while others are measured in a variety of ways.
? Momentum investing: Tendency of investors to base their decisions primarily or exclusively on earnings growth, rather than on company fundamentals. This growing tendency has been cited as a factor contributing to corporate managers' obsession with quarterly results, often to the detriment of long-term performance.
? Pooling: An accounting practice often employed by merging companies, in which the two firms combine their assets at book value, eliminating goodwill, and thereby hiding the premium one company paid for another. Also, with no goodwill to depreciate, the combined company's earnings are boosted.
? Restructuring reserve: Lumping together several years of anticipated future expenses and writing them off all at once as an extraordinary one-time charge. Doing this, rather than recording expenses in the year they are incurred, boosts future earnings.
? Revenue recognition: Timing strategy used by companies to record their revenues. A significant issue in industries where multi-year contracts are prevalent, because companies can "frontload" revenues booking several years' worth of future revenues into a single year, thereby boosting earnings.
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