As mentioned briefly before, Somero is incorporated in the USA, and as such it reports under US generally accepted accounting principles (GAAP). While sometimes subtle, the differences between accounting methodologies can impact our perception of a business, so it is always important to consider policy when comparing companies across borders. Further, the analysis of accounting policies in and of itself is a valuable process to ensure that our interpretation of financial information is reflective of economic reality.
Introduction
For the purpose of this article I will simply run through the policies in the latest financial statements, and as always I will be using the relevant checklist question set to help me focus my approach. In a later article I will then also go through the several previous years of accounting policy, purely to try and identify any changes. For the sake of brevity, I will try to concentrate on key issues and also on any unusual items, should they be present.
Balance Sheet Related Policy
One of the first items I notice is the allowance for doubtful debts policy. While not an issue, it is worth noting that they make use of a general allowance for bad debt based on experience, in addition to providing for specific items. When comparing with companies reporting under IFRS (the majority of listed companies in the UK), remember that no general allowance is permitted under IFRS and that provisions can only be made against specific items. I quite like the policy of a general provision above specific provisions purely for the sake of prudence.
Inventories are accounted for using the first in first out method (FIFO). Interesting this one as it is my understanding that last in first out (LIFO) is more common in the US for tax purposes, though LIFO is not permitted under IFRS. This is something that you would often have to adjust for when comparing US with British companies but that will not be a concern here.
The note on the intangibles and goodwill policy discloses that intangibles are primarily comprised of patents and customer relationships. These are carried at fair value at the point of acquisition less accumulated amortisation. It is highly speculative to try and determine the…
