Industry Practices Constraint

//Industry Practices Constraint
Industry Practices Constraint 2017-10-11T06:18:33+00:00

The industry practices constraint, also called the industry practices concept, states that the nature of certain industries and their practices can require the departure of traditional accounting theory. In other words, some industries have practices unlike any other that require specialized accounting or reporting. The industry practices constraint allows these industries to go outside of traditional accounting principles as long as it is infrequent and justifiable.

Most industry practices that depart from traditional GAAP only conflict with one or two accounting principles. In other words, an industry can’t completely disregard GAAP because of their specialized practices. They can bend one or two accounting principles for good reasons.

This makes sense because every industry is different and faces different financial reporting challenges. Every industry wouldn’t be able to follow the same exact guidelines and rules without incurring significant costs. The industry practices constraint goes hand in hand with the cost benefit principle. Sometimes conforming to GAAP is too costly for some industries, so they have adopted slightly modified practices.


Examples

– The agriculture industry reports its crops at their fair market value on the balance sheet instead of the traditional historical cost or production cost. This is common because calculating the actual cost per crop is too difficult and costly. Its easier for farmers to value and report their crops at the current market price.

– Most public utility companies report all non-current assets before current assets on their balance sheets. The utility industry presents its balance sheet this way to emphasize the fact that it is highly capitalized. In other words, utility companies want to show financial statement users that they have large investments in long-term assets, so they report them first on the balance sheet.