FAR 2 Flashcards
In general, what are the criteria for revenue recognition under US GAAP?
Earned an realized or realizable. The following 4 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 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
Each categorgy 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 reliable
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 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 transferred.
- 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?
Purchased intangible assets:
Recorded at cost, including legal and registration fees, under US GAAP and IFRS
How are intangible assets reported under US GAAP and IFRS?
US GAAP:
Reported at cost less amortization (finite life intangibles only) impairment
IFRS:
Reported using the cost model (same as US GAAP) or the revaluation model. Under the revaluation model, reported at fair value on revaluation date less subsequent amortization and impairment.
How should the contructual 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 include costs incurred in the formation of a corporation.
- Start-up costs are expensed in the period incurred
Defined goodwill
- Excess of the fair value of a subsidiary over the fair value of the subsidary’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?
US GAAP:
Research and development costs should be expenses as incurred unless and expenditure is for capital assets that have alternative future uses, or for research and development undertaken on behalf of others under a contractual arrangement.
IFRS
Research costs must be expenses. Development costs may be capitalized if they meet certain criteria.
List some items not considered research and development.
- Routine periodic design changes
- Marketing research
- Quality control testing
- Reformulation of a chemical compound
When should the costs of developing computer software for resale, lease, or licensing be capitalized under GAAP?
After technological feasibility has been established and before the product is released for sale
How should the costs of capitalized software developed for resale be amortized under US GAAP?
Annual amortization is the greater of:
Percent of Revenue Method:
Total capitalized amount x
Current gross revenue for the period/Total projected gross revenue for product
Straight-Line:
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 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
Infinite 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 asset’s value in use (PV 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 asset’s recoverable amount
How is goodwill impairment analyzed under US GAAP?
Goodwill impairment is analyzed at the reporting unit level using a 2-step process:
- Identify potential impairmnt by comparing the fair value of each reporting unit with its carrying value, including goodwill
- 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 nevessary to perform the 2-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.
Identify two methods of revenue recognition for long-term construction-type contracts under US GAAP and IFRS.
US GAAP:
- Percentage-of-completion
- Completed-contract
IFRS:
- Percentage-of-completion
- 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 contact x Total est. gross profit
-Gross profit recognized to date
