Chapter 2: Part 1

Question 1

Under U.S. GAAP, what are the criteria for each element of a contract that must be met before revenue may be recognized?

Answer 1

1. Persuasive evidence of an arrangement exists.
2. Delivery has occurred or services have been rendered.
3. The price is fixed and determinable; and
4. Collection is reasonably assured.

Question 2

What are the four categories of revenue recognition under IFRS?

Answer 2

1. Sale of Goods
2. Rendering of Services
3. Revenue from Interest, Royalties, and Dividends
4. Construction Contracts

Question 3

Under IFRS, revenue from the sale of goods may be recognized when all of the following items have been met:

Answer 3

• Revenue and costs can be measured reliably
• Economic benefits are probable
• The significant risks and rewards have been transferred to the buyer
• The entity does not retain managerial involvement

Question 4

Under IFRS, revenue from the rendering of services may be recognized when all of the following items have been met:

Answer 4

• Revenue and costs can be measured reliably
• Economic benefits are probable
• Stage of completion at the end of the reporting period can be measured reliably
• *recognized using the percentage of completion method**

Question 5

Under IFRS, revenue from interest, royalties, or dividends may be recognized when all of the following items have been met:

Answer 5

• Revenue and costs can be measured reliably

- Economic benefits are probable

Question 6

Under IFRS, revenue from construction contracts may be recognized when all of the following items have been met:

Answer 6

• Revenue and costs can be measured reliably
• Economic benefits are probable
• Both the contract costs to complete the contract and the stage of completion at the end of the reporting period can be measured reliably

Question 7

How are multiple element arrangements handled under U.S. GAAP?

Answer 7

The fair value of the contract must be allocated to the separate contract elements, then recognized separately.

Question 8

What criteria must be met in order for revenue to be recognized from a sales transaction with the right of return?

Answer 8

1. Sales price is fixed at date of sale
2. Buyer has assumed all risks of loss
3. Buyer has paid some form of consideration
4. The product sold is substantially complete
5. The amount of future returns is reasonably estimated

Question 9

How must internally developed intangibles be recorded under U.S. GAAP and what are the exceptions to this rule?

Answer 9

They are expensed, but the following costs are permitted to be capitalized:

1. Legal fees/other costs related to a successful defense
2. Registration and consulting fees
3. Design cost (ie. trademark)
4. Other direct costs to secure the asset

Question 10

How must internally developed intangibles be recorded under IFRS and what is the exception to this rule?

Answer 10

Research costs must be expensed, but development costs may be capitalized if the following conditions are met:

1. Technological feasibility has been established
2. The entity intends to complete the intangible asset
3. The entity has the ability to use or sell the asset
4. The intangible asset will generate future economic benefits
5. Adequate resources are available to complete it, sell or use it.
6. The entity can reliably measure the expenditure arising from the intangible asset.

Question 11

How is a patent amortized?

Answer 11

Over the shorter of its estimated life or remaining legal life.

Question 12

How is goodwill amortized?

Answer 12

Amortization of goodwill is NOT permitted, must be tested for impairment annually.

Question 13

Valuation of intangible assets under U.S. GAAP

Answer 13

• Finite life intangibles are reported at cost less amortization and impairment.
• Indefinite life intangibles are reported at cost less impairment.

Question 14

Valuation of intangible assets under IFRS

Answer 14

Can be done under either the cost model (same as US GAAP) or the revaluation model.

Question 15

Revaluation Model

Answer 15

Intangible assets are initially recorded at cost then revalued to fair value on the revaluation date.
Revaluation model carrying value = FV on revaluation date - subsequent amortization - subsequent impairment

Question 16

Where are revaluation losses reported?

Answer 16

Generally on the income statement, but if it reverses a previous gain then it is recognized in other comprehensive income.

Question 17

Where are revaluation gains reported?

Answer 17

Generally as part of other comprehensive income, but are reported on the income statement to the extent that they reverse a previously recognized revaluation loss.

Question 18

How are research and development costs accounted for under U.S. GAAP?

Answer 18

They are expensed with the exception of:

1. Materials, equipment, facilities that have alternate future uses. Capitalize and depreciate over useful life.
2. R and D done on behalf of others. Expense as cost of sales.

Question 19

Items not considered R and D:

Answer 19

• Design changes to old products or troubleshooting in production stage.
• Marketing research
• Quality control testing
• Reformation of a chemical compound

Question 20

Treatment of computer software developed to be sold, leased, or licensed under GAAP.

Answer 20

• Costs are expense until technological feasibility has been reached.
• Costs are capitalized after technological feasibility and up until product is released for sale.

There is no separate guidance under IFRS, follows general rule of intangibles

Question 21

Technological Feasibility

Answer 21

Completion of either:

1. A detailed program design
2. A working model

Question 22

Amortization of capitalized software costs under U.S. GAAP

Answer 22

Annual amortization based on the greater of the percentage of revenue or straight line method.

Question 23

Treatment of software developed for internal use only

Answer 23

Similar to software for sale: expense until technological feasibility then capitalize. Difference, capitalized costs should be amortized on a straight-line basis. If entity changes mind and sell, must recover costs before recognizing any revenue.

Question 24

Describe the impairment test for intangible assets with finite lives under U.S. GAAP?

Answer 24

Step 1: Determine the impairment using the Undiscounted future net cash flows. (net future cash flows - net carrying value)
Step 2: Amount of impairment (fair value / discounted cash flows - net carrying value)

If an asset has an indefinite life the use step 2 only

Question 25

Where is an impairment loss reported?

Answer 25

As part of income from continuing operations (I)DEA

Previously recognized impairment loss can NOT be reversed, unless the asset is held for disposal

Question 26

How is impairment for intangible assets (other than goodwill) treated under IFRS?

Answer 26

-Uses one step process to determine loss:
=carrying value compared to recoverable amount

Reversal of impairment losses are permitted under IFRS

Question 27

Define IFRS recoverable amount used for impairment testing of intangible assets.

Answer 27

The greater of:

• Asset’s FV - Costs to sale
• Asset’s value in use (present value of future cash flows)

Question 28

How is the determination of goodwill impairment different than that of the determination for other intangible assets?

Answer 28

It is calculated at the reporting unit approach. A reporting unit is an operating segment with separate cashflow, and is reviewed regularly by management.

Question 29

Evaluation of goodwill impairment under U.S. GAAP

Answer 29

Step 1: identify potential impairment by comparing FV to the carry amount of the reporting unit.
Step 2: measure amount of impairment by comparing implied FV to the carry amount of the goodwill.

Question 30

Evaluation of goodwill impairment under IFRS

Answer 30

-Calculated at the cash-generating unit level.
Step 1: carrying value - recoverable amount
-Loss is allocated to goodwill and then on a pro rata basis to the other assets of the CGU.

Question 31

Under U.S. GAAP, a private company may elect to apply the following methods to goodwill accounting.

Answer 31

1. Amortize straight line over 10 years or less (must prove another useful life)
2. Test for impairment at entity or reporting unit level at a triggering event, disclose in footnotes.

Question 32

What are the advantages/disadvantages of using the completed contract method?

Answer 32

Advantage: based on final numbers and not estimates
Disadvantage: If contract extends over more than one accounting period, does not reflect matching principle.

Question 33

What is the treatment of the completed contract method under IFRS?

Answer 33

-It is NOT permitted, must use percentage of completion method unless final outcome of project can’t be estimated. In this case cost of recovery method must be used.

Question 34

How is the completed contract method presented on the balance sheet?

Answer 34

The excess of costs over related billings is shown as a current asset and the excess of billings over related costs is a liability.

Question 35

Problem solving formulas:
Gross Profit
Gross Profit Percentage
Earned Gross Profit
Deferred Gross Profit

Answer 35

GP = Sales - COGS
GPP = GP / Sales Price
Earned GP = Cash Collection x GPP
Deferred GP = Installment Receivable x GPP

Question 36

When is it permissible to use the Installment Sales method?

Answer 36

-When there is no reasonable basis for estimating the degree of collectability. Revenue is not recognized until the cash is collected.