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FAR > 11. Rev Recognition, Employee/Retiree Benefit Plans, Share-Based pmts > Flashcards

11. Rev Recognition, Employee/Retiree Benefit Plans, Share-Based pmts Flashcards

1
Q

What’s the definition of revenue?

A

The inflow of an asset or extinguishment of a liab from providing goods/services

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2
Q

What’s the two criteria for general revenue recognition?

A

Earned and realizable

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3
Q

What does installment method do? When is it used?

How to compute?

A

Defer gross profit until cash is collected.
When the earning process is complete, but collectibility is uncertain.
Gross profit %=GP on sale / sale price
Recognized GP: cash collected x GP%
Deferred GP: A/R bal. x GP%

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4
Q

BS presentation of installment method?

A

AR
Less Deferred GP
= Net AR

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5
Q

Installment AR T account?

A

Dr side: sales

Cr side: cash collected (GP realized / GP%)

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6
Q

Does U and I recognize revenue and gain separately?

A

U: yes
I: no, rev include gain

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7
Q

What’s the revenue recognition criteria under IFRS?

A

The amount of rev, cost can be measured reliably
Collection probable
Risk/reward of ownership transferred
The stage of completion can be measured reliably

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8
Q

Is cost recovery method more conservative than installment method? When is it used?

A

Yes. When realizability is significantly uncertain.

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9
Q

Cost recovery method: when does GP recognized?

A

When cost is recovered

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10
Q

Franchise fee: when can initial fee be recognized?

A

When all services completed

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11
Q

Franchise: which method must be used when collectibility is uncertain?
When conditions will be met over a period of time?

A

Installment method or cost method

% of completion or completed contract method

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12
Q

Sales with a right of return: what are 6 criteria before net sales can be recognized?

A

Price is fixed or determinable
Buyer pd or is obligated to pay
Obligation won’t change in the event of theft, damages, destruction
Buyer has economic substance apart from the seller
Seller doesn’t have a significant obligations for future performance to directly bring about results of the product by the buyer
The amount of future returns can be reasonably estimated

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13
Q

When is contract accounting used?

What are two methods?

A

When there is uncertainty about the timing of the completion of the earnings process and/or the ability to estimate rev and related expense
% of completion method
Completion of production method

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14
Q

How to compute % of completion method?

A

Degree of completion: costs to date / estimated total costs
Profit to date: degree of completion x expected total profit
Profit recognized in current yr: profit to date - previously recognized profit

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15
Q

What’s in construction in process T account?

A

Dr: construction costs, profits to date
Cr: construction billing, losses

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16
Q

How net assets or liab determined in BS from CIP acct?

A

When Dr side is larger than Cr side - net asset

Dr is smaller than Cr - net liab

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17
Q

When should contract losses, single loss or overall loss, be recognized under PC and CC method? What do you do when there was profit recognized previously?

A

In the period it occur for both.

Remove the profit by adding it to the loss amount = total loss recognized.

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18
Q

When should completed contract method be used?

A

When there is significant uncertainty of cost estimation.
No profit recognized until the work is substantially completed
Recognize 100% of an anticipated loss immidiately

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19
Q

Which method IFRS require when there is uncertainty about the timing of completion?

A

% of completed method

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20
Q

IFRS: which method should be used when % of completion method not appropriate?

A

Cost recovery method.

Completed contract method not allowed

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21
Q

Explain defined contribution plan and defined benefits plan

A

C: Annual employer contribution defined, employee bears the risk of fund performance and benefits.
B: Annual retirement benefit defined, employer bears the risk

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22
Q

What is PBO?

A

Projected benefit obligation: Estimated pension plan liability @ the PV
PV of expected CF
Based on # of yrs of service, final/highest salary attained, age@retirement

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23
Q

How should plan asset be measured?

A

At FV

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24
Q

Financial stmt presentation? Can different plans offset each other’s asset or liability?

A

IS: annual pension expense (continuing operations).
BS: difference between pension fund and PBO. PBO larger: liab. PBO smaller: asset.
No.

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25
Q

What’s the 5 components of pension expense? Which one occur every year? When is it computed for reporting?

A

(1) Service cost (2) Interest costs (increase pension expense)
(3) Expected return on plan assets (reduce PE)
(4) Amortization of prior service costs (almost always increase PE)
(5) Amortization of net G/L (decrease PE).
(1)-(3).
Beginning of the year.

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26
Q

When should G/L for PSC and PBO be recognized?

A

Immidiately

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27
Q

What is the prior service cost?

A

An increase in SC for service provided in the past from a plan amendment.

28
Q

What’s the impact of PSC? Impact of amortization?

A

Initial recognition of PSC increases PBO by PV of the amount.
No IS impact - the amount is reduction of OCI.
Dr: OCI. Cr: Pension liability (PBO).

Dr: Pension expense. Cr: OCI.

29
Q

What’s the two methods allowed to amortize PSC?

A

SL method and service method

30
Q

How to use SL method to amortize PSC?

A

Compute average remaining service period of employees.

Divide PSC by the average yrs

31
Q

How to compute service method?

A

(1) Add all the estimated service yrs for employees.
Divide PSC by the number #1.
For each yr, number of people working x #1 = pension expense for the year.

32
Q

What are two methods allowed to amortize pension G/L?

A

SL method and minimum (corridor) method.

33
Q

How to use Corridor method?

A

(Net pension G/L - Corridor amount) / average remaining service life.
Corridor amount: 10% of larger of PBO or asset at Jan 1.

34
Q

What is PBO called under IFRS? How is computed?

A

Defined benefit obligation (DBO).

Same as GAAP +-unrecognized pension G/L - unrecognized PSC.

35
Q

What’s PSC called under IFRS?

A

Past service cost

36
Q

How is pension expense reported under U and I?

A

U: Netted
I: Separately: SC (includes PSC), Net interest cost (netted with expected return)

37
Q

What’s the primary measure of the obligation for post retirement benefit? How do you compute balance sheet liability? Which item added for post retirement benefits? How is it computed?

A

Accumulated Post retirement benefit obligation (APBO).
APBO - plan asset.
Amortization of transition obligation.
SL amortization.

38
Q

When is the service period (employee must to work) for stock option?

A

Between grant date and vesting date (can begin exercising)

39
Q

When does compensation expense measured?

A

At the grant date

40
Q

Does forfeiture reduce compensation expense?

A

Yes

41
Q

For stock award and options, change in FV during service period updated?

A

No

42
Q

Installment method JE.

A

1st month:
Dr: Installment AR. Cr: Sales.
Dr: COGS. Cr: Inventory.
Dr: Sales. Cr: COGS. Cr: Deferred GP (AR contra acct).
Dr: Cash. Cr: Installment AR.
Dr: Deferred GP. Cr: Realized GP installment.
2nd month on:
Dr: Cash. Cr: Installment AR.
Dr: Deferred GP. Cr: Realized GP installment.

43
Q

Installment method. How does BS look like? Income stmt?

A

BS: AR.- (Deferred GP) = Net AR.
IS: Realized GP installment.

44
Q

Cost recovery method: JE.

A 
Dr: Installment Ar. CR: Sales.
Dr: COGS. CR: Inv.
Dr: Sales. Cr: COGS. Cr: Deferred GP.
DR: Cash. Cr: AR.
After cost is collected.
Dr: Cash. Cr: AR.
Dr: Deferred GP. Cr: Realized installment GP.
45
Q

When should the percentage-of-completion be used? Completion-of-production method?

A

P: For a long-term contract. When cost is estimable.
C: When cost is not dependably estimable and/or the certainty of completion is questionable.

46
Q

Contract methods: Does billing affect revenue recognition?

A

No.

47
Q

When is PBO and plan asset decreased?

A

When benefits payment is made.

48
Q

Pension: What is interest cost? When does it occur for example?

A

Growth in PBO due to the passage of time=discount rate x PBO at the beg of year.
When there is Prior service cost earned to date, it should earn interest = interest cost.

49
Q

how to compute service cost?

A
  1. Pva (length of retirement) x retirement annual pmt.

2. Pv1 (length before retirement) x #1.

50
Q

G/L. When the obligation decreases, is it PBO G/L?

A

PBO gain.

51
Q

What are two causes of pension G/L?

A

PBO change and asset change.

52
Q

Where does the pension G/L recorded? JE.

A

Dr: Pension G/L OCI. Cr: Pension liability.

53
Q

Which pension gain and losses must be used: Beg or what happens during the year?

A

Beginning.

54
Q

Is pension G/L amortized under IFRS?

A

No, recognized in full in AOCI immediately. Never released in earnings.

55
Q

How is APBO computed? If expected service that will be provided by the employee is 20 years and he worked for 12 years so far.

A

APBO=(12/20) x EPBO: expected post retirement benefit obligation.

56
Q

When must an employer’s obligation for post retirement benefits be fully accrued?

A

At the time of full eligibility

57
Q

Stock purchase plan: What are the compensation expense? JE?

A

If non-compensatory, =amount paid by employer.
Dr: Compensation expense (pd by employer). Dr: Cash. Cr: CS. Cr: APIC.
If compensatory, =amount paid by employer plus discount.
Dr: Compensation expense (pd by employer: plus discount). Dr: Cash. Cr: CS. Cr: APIC.

58
Q

Stock option plan: What are the compensation expense? How is it recognized? JE? 100 options, 3 yrs service period, FV:$3.

A

Always compensatory. = FV of option @ grant date. - adjusted for forfeiture (can be estimate or as occur).
Total expense amortized over the service period (SL).
Dr: Comp expense (100x$3/3yrs). Cr: APIC-stock option.

59
Q

Stock purchase: Criteria to be non compensatory?

A

All employees can participate, employer must decide within one month of setting price for stock to enroll in the plan, can’t give significant discount (more than 5 or so%), purchase price must be based on market price, employees can cancel before purchase date with full refund.

60
Q

Stock option plan: How to compute compensation expense when forfeiture occurred in the year 2. 100 options, 3 yrs service period, FV:$3.

A

Yr 1: Comp expense: (100x$3)/3yrs=$100
Yr 2: Forfeiture: 30. Revised comp expense:$300- (30x$3)=$210.
Comp exp: (2/3)x210 - $100 (yr 1 exp) = $40.

61
Q

Stock option plan: When forfeiture is estimated to be 3%, how to compute expense?100 options, 3 yrs service period, FV:$3.

A

[($3x100)x(1-0.03)3}/3. (1-0.03)3 is 0.97x0.97x0.97.

62
Q

Stock option: JE at exercise?

A

Dr: Cash (option# x strike price). Dr: APIC-stock option.
Cr: CS. Cr: APIC (plug).

63
Q

Stock option: JE to record expired options. What happens to comp exp?

A

Dr: APIC-stock options. Cr: APIC-expired stock options.

No retroactive change. Remains on the book.

64
Q

Performance based plan: What happens to comp exp when no option vested because performance not met.

A

Reverse expense.

65
Q

Stock award: Total compensation expense? How is it recognized? JE: 1,000 shares to receive, $18 @ grant date, 3 yrs service period, par $2

A

FV of stock @ grant date.
Over the service period.
Dr: Comp exp 6,000. Cr: APIC-restricted stock 6,000.
Vested:
Dr: APIC-restricted 18,000. Cr: CS 2,000. Cr: APIC 16,000.

66
Q

Stock award: What happens to comp expense when award did not vest?

A

Reverse. Dr: APIC-restricted stock. Cr: Comp exp.

67
Q

What is stock appreciation rights? When is liability recorded?

A

Employees receives amount equal to the increase in FV of stock. If appreciation can be paid by cash, Cr: liability rather than APIC.

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