Flashcards in F2 Deck (45):
In general, what are the criteria for revenue recognition under US GAAP?
Earned and realizable. The following four criteria must be met before revenue can be recognized:
1. Persuasive evidence of an arrangement exists.
2. Delivery has occurred or services have been rendered
3. The price is fixed and determinable
4. Collection is reasonably assured
What are the four categories of revenue transaction under IFRS and what are the common revenue recognition criteria for those categories?
1. Sale of goods
2. rendering of services
3. revenue from interest, royalties, and dividends
4. construction contracts
Common revenue recognition criteria include:
* revenue and costs can be reliably measured
* it is probable that economic benefit will flow to the entity
Each category has additional criteria.
When should revenue from the performance of services be recognized under US GAAP and IFRS?
US GAAP - in the period in which the 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 risk of loss because the goods are considered in the buyer's 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 transfered
* The percentage-of-completion method of long-term 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
Purchase intangible assets - recorded at cost, including legal and registration fees, under US GAAP and IFRS
Internally developed intangible assets:
* Legal fees, costs of successful defence, registration fees, consulting fees, and design fees can be capitalized under US GAAP and IFRS
* Under US GAAP, research and development 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?
Reported at cost less amortization (finite life intangibles only) and impairment
reported using cost model (same as US GAAP) or the revaluation model. Under the revaluation model, reported at fair value on revaluation dates less subsequent amortization and impairment
How should the contractual amounts of future services to be performed under a franchise agreement be accounted for by 1) the franchisor and 2) 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 start-up costs. What is the accounting treatment of start-up costs?
* costs incurred for one-time activities to start a new operation. Start-up costs incurred in the formation of a corporation
* start-up costs are expensed in the period incurred
*Excess of the fair value of a subsidiary over the fair vale of the subsidiary's net assets
* costs of maintaining and/or developing goodwill cannot be capitalized
What is the maximum period over which 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?
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 of behalf of others under a contractual arrangement
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
* re performance of a chemical compound
When should the cost of developing computer software for resale, lease, or licensing be capitalized under US GAAP?
After technological feasibiilty 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:
1) Percent of Revenue Method:
total capitalized amount x (current gross revenue for
the period/ total projected gross revenue for product)
total capitalized amount x (1 / 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 preliminary project state and for upgrades and enhancements
* Capitalized costs should be amortized on a straight-line basis
What is the test of recover-ability 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 values less costs to sell and the asset's 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
The amount by which the carrying amount exceeds the asset's recoverable amount
How is goodwill impairment analyzed under US GAAP?
Goodwill impairment is analyzed at the reporting unit level using a two-step process:
1) Identify potential impairment by comparing the fair value of each reporting unit with the carrying value, including goodwill
2) Measure the amount of goodwill impairment by comparing the implied fair value of the reporting unit's goodwill to its carrying amount
NOTE: Under US GAAP, the goodwill impairment test has been simplified by allowing companies to test qualitative factors first to determine whether it is necessary to perform the two-step goodwill impairment test
How is goodwill impairment analyzed under IFRS?
Goodwill impairment testing is done at the cash- generating unit (CGU) 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 rata basis to the other CGU assets.
Under US GAAP, a private company may elect to apply the alternative method of goodwill accounting. Describe the steps of this method.
* Amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the entity can demonstrate that another useful life is more appropriate.
* Make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level when a triggering event occurs that indicated that the fair value of an entity (or reporting unit) may be below its carrying amount
*This alternative method must be applied to all existing goodwill and any goodwill generated in future business combinations.
Identify two methods of revenue recognition for long-term construction-type contracts under US GAAP and IFRS.
US GAAP -
* Completed contract
* Cost recovery
For long term 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 long term construction-type contracts under the percentage of completion method.
(Total cost to date/ total estimated cost of contract) 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)
What are profits recognized under the cost recovery method?
Profits are recognized only after all costs have been recovered
How are gains/losses of nonmonetary exchanges recognized under US GAAP?
Exchange has commercial substance - always recognize gains and losses on the exchange equal to the difference between the FV of what is given up and the carrying value of what is given up
Exchange does not have commercial substance or the new asset's fair value is not determinable (and the FV of the asset given us is unknown) - no gain on exchange is recognized unless boot is received, and losses are recognized in full ( if losses exist because an impairment loss was not previously recognized)
If boot received is greater than 25% of total consideration, all gains and losses are recognized by both parties to the exchange just as in a monetary transaction that has commercial substance
How are gains/losses on nonmonetary exchanges recognized under IFRS?
*Exchange of similar assets - No gains recognized. Losses recognized in full
* Exchange of dissimilar assets - All gains and losses recognized
When will an asset exchange have commercial substance under US GAAP?
* An asset exchange generally has commercial substance when the 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 exchanged
NOTE - the FASB has not provided specific guidance, nor has it provided examples of transactions that would meet the criteria for commercial substance. Although it is not certain what will occur on the CPA exam, the question should make it clear whether an exchange has or lacks commercial substance.
In nonmonetary exchange, what is the basis of the new asset under US GAAP?
* In an exchange that has commercial substance( or exchange when boot received exceeds 25% of the total consideration), record at fair value of asset given up + cash paid (or - cash received), or the fair value of the asset received if it is more clearly evident
* In an exchange that lacks commercial substance, record at the net book value of the asset given up + cash paid (or - cash received), unless adjustments are needed for gain recognized (if boot is received)
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 and notes receivable, and accounts and notes payable
* 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 transactions
What is an entity's functional currency under US GAAP?
The functional currency is the currency of the primary economic environment in which the entity operated. 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 or investor's functional currency
* The local economy of the foreign entity is not highly inflationary
When is the translation method used?
Translation is used to restate financial statements denominated in the functional currency to the reporting currency.
When is the re-measurement method used?
Re-measurement 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 balance sheet and income statement.
* Assets and Liabilities - current exchange rate
* Common Stock and APIC - historical rate
* Revenue and Expenses - Weighted average exchange rate for the period
Identify the exchange rate to be used when remeasuring different components of the balance sheet and income statement
Balance Sheet -
* monetary - current exchange rate
* nonmonetary - historical rate
Income statement -
* balance sheet related - historical rate
* non- balance-sheet related - weighted average
Where are re-measurement gains/losses reported in the financial statements?
Re-measurement gains or losses are recognized on the income statement
Where are translation adjustments reported in the financial statements?
Translation gains or losses are reported in other comprehensive income (OCI). They are treated as unrealized gains and losses.
State two types of foreign currency transactions
1) Overstating transactions, such as importing, exporting, borrowing, lending, and investing transactions
2) 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 or losses reported in the financial statements?
Foreign currency transaction gains or losses are included in determining net income for the period.
For operating transactions in foreign currency, detail the recording process.
* Record original transaction at exchange or spot rate on date of transaction.
* At balance sheet date, compute gain/loss on the transaction by recalculating using the current exchange or spot rate.
* On payment date, compute gain/loss on the transaction by using the exchange rate on payment date.