In general what are the criteria for revenue recognition under US GAAP
Earned and realized or realizable. The following four criteria must be met before revenue can be recognized
Persuasive evidence of an arrangement exists
Delivery has occurred or services have been rendered
The price is fixed and determinable
Collection is reasonably assured
What are the four categories of revenue transactions under IFRS and what are the common revenue recognition criteria for those categories?
Sales of goods
Rendering of services
Revenue from interest, royalties, and dividends
Construction Contracts
Common revenue recognition criteria include:
Revenues and costs can be reliably measured
It is probable that economic benefits will flow to the entity
When should revenue from performance of services be recognized under US GAAP and IFRS
US GAAP
In the period in which services have been rendered and are able to be billed
IFRS
Using the percentage of completion method when the outcome of the transaction can be estimated reliably
What are the conditions for revenue recognition when the right of return exists?
The sales price is substantially fixed at the time of sale
The buyer assumes all risks of loss because the goods are considered in the buyers possession
The buyer has paid some form of consideration
The product sold is substantially complete
THe amount of future returns can be reasonably estimated
Name an example of both 1) accelerated and 2) deferred revenue recognition relative to normal recognition when revenue is recognized at the time goods are transferred
The percentage of completion method of longterm construction accounting is an example of accelerated revenue recognition.
The installment method (or cost recovery method) is an example of deferred revenue recognition
How are purchased intangible assets and internally developed intangible assets recorded under US GAAP and IFRS
Purchased Intangible assets:
Recorded at cost, including legal and registration fees, under US GAAP and IFRS
Internally developed intangible assets:
Legal fees, costs of successful defense, registration fees, consulting fees, and design fees can be capitalized under US GAAP and IFRS
Under US GAAP R&D costs must be expensed. Under IFRS research costs must be expensed but development costs may be capitalized if they meet certain criteria
How are intangible assets reported under US GAAP and IFRS?
US GAAP
Reported at cost less amortization and impairment
IFRS
Reported using the cost model (same as GAAP) or revaluation model. Under revaluation model reported at fair value on revaluation date less subsequent amortization and impairment
How should contractual amounts of future services to be performed under a franchise agreement be accounted for by. The franchisor and the franchisee
They should be recorded at their present value as unearned revenue by the franchisor until earned and as an intangible asset by the franchisee
Define startup costs
what is the accounting treatment of startup costs?
Costs incurred for onetime activities to start a new operation. Startup costs include costs incurred in the formation of a corporation
Startup costs are expensed in the period incurred
Define goodwill
Excess of the fair value of a subsidiary over the fair value of the subsidiary’s net assets
Costs of maintaining and or developing goodwill cannot be capitalized
What is the maximum period overwhich an identifiable intangible asset (not goodwill) should be amortized?
The shorter of its estimated useful economic life and its remaining legal life (as in a copyright, franchise or patent)
Goodwill is not amortized but must be tested at least annually for impairment
What is the proper treatment of research and development costs under US GAAP and IFRS
US GAAP
Research and development costs should be expensed as incurred unless an expenditure is for capital assets that have alternative future uses, or for research and development undertaken on behalf of thers under a contractual arrangement
IFRS
Research costs must be expensed. Development costs may be capitalized if they meet certain criteria
List some items not considered research and development costs
Routine periodic design changes
Marketing research
Quality control testing
Reformation of a chemical compound
When should the costs of developing computer software for resale, lease or licensing be capitalized under US GAAP
After technological feasibility has been established and before the product is released for sale
How should the costs of capitalized computer software developed for resale be amortized under US GAAP
Annual amortization is the greater of
Percent of Revenue Method
Total Capitalization amount x (current gross revenue fro the period / total projected gross revenue for product)
Straightline
Total capitalization amount / estimate of economic life
Outline the treatment of computer software developed internally or obtained for internal use only under US GAAP
Expense costs incurred in the preliminary project state and costs incurred in training and maintenance
Capitalize costs incurred after the preliminary project state and for upgrades and enhancements
Capitalize costs should be amortized on a straightline basis
What is the test of recoverability for the impairment of long-lived assets other than goodwill under US GAAP
Finite Life
If undiscounted future cash flows expected from use of asset and eventual disposal is less than the carrying value recognize loss on impairment
Indefinite life
if fair value is less than carrying value recognize loss on impairment
How is impairment of long lived assets other than goodwill analyzed under IFRS?
Compare the carrying value of the asset to the asset’s recoverable amount
The recoverable amount is the greater of the asset’s fair value less costs to sell and the assets value in use (PV of future cash flows)
What is the calculation for impairment loss under US GAAP and IFRS
US GAAP
The amount by which the carrying amount exceeds the fair value of the asset
IFRS
The amount by which the carrying amount exceeds the assets recoverable amount
How is goodwill impairment analyzed under US GAAP
Goodwill impairment is analyzed at the reporting unit level using a two step process
Identify potential impairment by comparing the fair value of each reporting unit with the carrying value including goodwill
Measure the amount of goodwill impairment by comparing the implied fari value of the reporting unit’s goodwill to its carrying amount
How is goodwill impairment analyzed under IFRS
Goodwill impairment is done at the cash generating unit level using a one step test that compares the carrying value of the CGU to the CGU’s recoverable amount
Impairment losses are first allocated to goodwill and then allocated on a pro rate bais to other CGU assets
Identify two methods of revenue recognition for longterm construction type contracts under US GAAP and IFRS
US GAAP Percentage of Completion Completed Contract IFRS Percentage of Completion Cost Recovery
For longterm construction type contracts when are losses recognized
Immediately when discovered regardless of the method used for revenue recognition
State the formula for recognizing the gain/loss on longterm construction type contracts under the percentage completion method
Total cost to date / total estimated costs x total est gross profit
- Gross profit recognized to date
State the formula for calculating the gross profit realized on installment sales
Cash received x (total gross profit / Sales price)
When are profits recognized under the cost recovery method?
Profits are recognized only after all costs have been recovered
How are gains and losses on nonmonetary exchanges recognized under US GAAP
Exchange has commercial substance always recognize gains/losses between FV of property given up and CV of property given up
Exchange lacking commercial substance no gain on exchange unless boot is received losses are recognized in full
If boot received is greater than 25% of total consideration all gains/losses are recognized by both parties
How are gains/losses on nonmonetary exchanges recognized under IFRS
Exchange of similar assets no gains recognized losses recognized in full
Exchange of dissimilar all gains and losses recognized
When will an asset exchange have commercial substance under US GAAP
An asset exchange generally has commercial substance when entity expects a change in future cash flows as a result of the exchange and that expected change is material relative to the fv of the assets exchaged
In a nonmonetary exchange what is the basis of the new asset under US GAAP
In an exchange that has commercial substance record at fair value of asset given up + cash paid (or - cash received) or the FV of the asset received if it is more clearly evident
In an exchange that lacks commercial substance record at NBV of the asset given up + cash paid (- cash received) unless adjustments are needed for gain recognized
What are monetary items?
Assets and Liabilities that are fixed in amount by contract or in terms of number of dollars
Examples include cash, accounts/notes rec, accounts/notes pay
These items are already stated in constant dollars
What are nonmonetary items
Assets and liabilities that fluctuate in value with inflation/deflation
Examples are inventories, property plant and equipment and capital stock. These items need to be restated to constant dollars
Identify the two foreign currency activities
Foreign Currency Translations
Foreign Currency transations
What is an entity’s functional currency under US GAAP
The functional currency is the currency of the primary economic environment on which the entity operates all of the following conditions must be met
The foreign operations are relatively self contained and integrated within the country
The day to day operations do not depend on the parent’s functional currency
The local economy of this foreign entity is not highly inflationary
When is the translation method used?
Translation method is used to restate financial statements denominated in the functional currency to the reporting currency
When is the remeasurement method used
Remeasurement is used to restate financial statements from the foreign currency to the entity’s functional currency when
The reporting currency is the functional currency
The financial statements must be restated in the entity’s functional currency prior to translating from the functional currency to the reporting currency
Identify the exchange rate to be used when translating different components of the BS and IS
Assets & Liabilities Current Exchange Rate Common Stock and APIC Historical Rate Revenues and Expenses Weighted average exchange rate for the period
Identify the exchange rate to be used when remeasuring different components of the BS and IS
BS Monetary Current exchange rate Nonmonetary historical IS Balance sheet related Historical rate Non balance sheet related Weighted average
Where are remeasurement gains/losses reported in the financial statements
Remeasurement gains/losses are recognized on the IS
Where are translation adjustments reported in the FS’s
Translation gains/losses are reported in OCI they are treated as unrealized gains/losses
State two types of foreign currency transactions
Operating transactions such as importing exporting borrowing lending and investing transactons
Forward exchange contracts which are agreements to exchange two different currencies at a specific future date at a specific rate
Where are foreign currency transaction gains/losses reported in the FS
Foreign currency transaction gains/losses are included in determining NI for the period
For operating transactions in foreign currency detail the recording process
Record original transaction at the exchange or spot rate on date of transaction
At BS date compute gain/loss on the transaction by recalculating using current exchange rate or spot rate
On payment date compute gain/loss on the transaction by using the exchange rate on payment date
What are the general guidelines for OCBOA FS presentation
Different titles from accrual basis FS
Required FS are equivalent of the accrual basis BS and IS
FS should explain changes in equity accounts
A statement of CF is not required
Disclosure should be similar to GAAP FS disclosures
