Flashcards in FAR 63 - Misc. Trans, Events and Disclosures 1 - Related Parties/R&D/Risks & Uncertainties Deck (28):
Transactions with related parties are a required disclosure under both US GAAP and IFRS. Those disclosures can help the financial statement user assess the nature of the relationship and extent of the transactions between the related parties. Which of the following is not a reason for related party disclosures?
A. Transactions between related parties may not be at "arms length," and therefore the results of the financial statements may be distorted by intercompany pricing versus independent third-party pricing.
B. Related party transactions may not convey the economic substance of the transaction because of favorable terms or conditions.
C. Related party transactions are not appropriate in the normal course of operations.
D. A transaction with a related party may occur without charge and therefore not be recognized on the financial statements.
C. This question is in the null form - that is, the question asks which of the following is NOT a reason for disclosure. This response is NOT a reason for disclosure. The response assumes that related party transactions are inappropriate. Related party transactions are appropriate (and sometimes necessary) but need to be disclosed. Therefore, the assumption of inappropriateness is not what is driving the disclosure; disclosures are made to fully inform the financial statement user.
T/F: Supplier of significant raw material is not an example of a related party.
T/F: Related party transactions are deemed to be arms-length transactions.
They are not arms-length which makes them related party transactions.
T/F: All related party transactions require footnote disclosure.
Only required for material related party transactions.
Which of the following is the proper treatment of the cost of equipment used in research and development activities that will have alternative future uses?
A. Expensed in the year in which the research and development project started.
B. Capitalized and depreciated over the term of the research and development project.
C. Capitalized and depreciated over its estimated useful life.
D. Either capitalized or expensed, but not both, depending on the term of the research and development project
C. Equipment that is used in research and development activities and has alternative future uses should be depreciated over its estimated useful life. During the time that the equipment is used for R&D activities the depreciation will be recorded as R&D expense.
When payments are made to a 3rd party for R & D services, should they be included in the R & D expense?
Yes. The cost of payments to an outside party to perform R & D is as much R & D as internally incurred costs - their objective is the same.
On January 1, 2005, Jambon purchased equipment for use in developing a new product. Jambon uses the straight-line depreciation method. The equipment could provide benefits over a 10-year period.
However, the new product development is expected to take 5 years, and the equipment can be used only for this project.
Jambon's 2005 expense equals
A. The total cost of the equipment.
B. One-fifth of the cost of the equipment.
C. One-tenth of the cost of the equipment.
A. The equipment is being used solely in research and development. Even though the equipment has a 5-year useful life, the only use of the machine is in this particular research project.
Therefore, it qualifies as research and development and is expensed immediately. If it had usefulness apart from this project, then it would be depreciated over its useful life.
Under U.S. GAAP, how should NSB, Inc. report significant research and development costs incurred?
A. Expense all costs in the year incurred.
B. Capitalize the costs and amortize over a five-year period.
C. Capitalize the costs and amortize over a 40-year period.
D. Expense all costs two years before and five years after the year incurred.
A. Under U.S. GAAP, all research and development costs are expensed as incurred.
Which of the following is a research and development cost?
A. Development or improvement of techniques and processes
B. Offshore oil exploration that is the primary activity of a company
C. Research and development performed under contract for others
D. Market research related to a major product for the company
A. R & D is the pursuit of new knowledge and the translation of that knowledge to new products and processes. Improvement in techniques and processes is also "new" in that sense and is included in R & D.
Which of the following is an example of activities that would typically be excluded in research and development costs?
A. Design, construction, and testing of preproduction prototypes and models
B. Laboratory research aimed at discovery of new knowledge
C. Quality control during commercial production, including routine testing of products
D. Testing in search for, or evaluation of, product or process alternatives
C. ASC 730 clearly defines R & D expenditures. Routine activities involving existing production, including quality control activities, are not considered a search for new knowledge (research) or translation of that knowledge to new products and services (development).
T/F: The cost of all plant assets devoted to R&D is expensed immediately.
If there is any future use for the asset outside of R&D it's depreciation expense is reallocated to R&D expense.
T/F: R&D includes conceptual formulation and design of possible products or process alternatives.
T/F: IFRS permits capitalization of both research and development costs.
IFRS allows companies to capitalize development costs.
T/F: Development includes the translation of research findings toward the design of a new product or significant improvement in existing products.
T/F: For an expenditure to be included in R&D, it must pertain to efforts aimed at developing an entirely new product.
Research : The attempt to discover new knowledge aimed at the development of new products, services, processes, or techniques, or the significant improvement in an existing product.
Development : The translation of research findings or knowledge into a plan or design of a new product or significant improvement in an existing product or process whether intended for sale or use. Development includes formulation, design and testing of product alternatives, construction of prototypes, and operations of pilot plants.
T/F: Development costs are expensed under IFRS. Development costs are the translation of research findings into a plan or design for a new product or process or for significant improvement to an existing product or process.
IFRS allows companies to capitalize development costs. Otherwise correct.
T/F: R&D includes troubleshooting.
Development does not include routine or periodic alterations to existing products, processes, or other ongoing operations. It also does not include market research.
What are some of the costs included in R&D?
1. Laboratory research;
2. Conceptual formulation and design of possible products or process alternatives;
3. Modification of the formulation or design of a product or process;
4. Design, construction, and testing of preproduction prototypes and models;
5. Design of tools, jigs, molds, and dies involving new technology;
6. Design of a pilot plant.
What are some of the costs excluded from R&D?
1. Engineering follow-through;
2. Quality control and routine testing;
4. Adaptation of an existing capability to a particular customer's needs;
5. Routine design of tools, jigs, molds and dies;
6. Legal work in connection with patent applications;
7. Software development costs.
Which of the following is not a source of risk and uncertainty for which disclosures are required by GAAP?
A. Nature of a firm's operations
B. Effect of changes in government regulations
C. Use of estimates in financial statements
D. Vulnerability to significant concentrations
B. This is not one of the four sources noted in the applicable standard. It is specifically noted as a source not included in the accounting standard.
Under what conditions is disclosure about risks and uncertainty pertaining to concentrations required?
A. If the firm has any of the concentrations for which disclosures are required by GAAP
B. If events affecting the firm negatively have already occurred, with respect to a concentration
C. If the firm is vulnerable to a severe impact in the near term because of a concentration, and it is at least reasonably possible that the impact will occur
D. If the Board of Directors has taken a direct action serving to reduce risk and uncertainty within a given concentration
C. Disclosures are required when the event is reasonably possible. The event is not required to be probable.
Which of the following is not an aspect of a firm's operations necessitating disclosure of risks and uncertainties?
A. Principal markets
B. Products and services
C. Pension plan
D. Geographical location
C. This is an internal policy matter and is not listed as a specific attribute for disclosure in the standard.
What information about estimates is not required to be disclosed?
A. That estimates involve assumptions about future events
B. Possible material financial statement effects of estimate changes
C. That estimates are required in preparing financial statements
D. The old and new estimate in quantitative terms
D. The actual numerical estimates typically are not disclosed. Rather, it is the effect of the change which is of interest to financial statement users.
Which of the following is not one of the concentrations about which disclosures are required?
A. Concentrations in revenue
B. Concentrations in sources of supply
C. Concentrations in the market for the firm's products
D. Concentrations in investment in other firm's stock for which ownership is less than 20% in any specific investment
D. Although diversification may be lacking in a firm's investment portfolio, passive investments are not one of the concentrations for which a firm is considered to be vulnerable.
The fourth concentration (besides the three other answer alternatives) is concentration in the volume of business with a particular customer or supplier.
T/F: The period over which the requirements concerning disclosures about risks and uncertainties pertain is the "near term" or one year from the issuance of the financial statements.
T/F: Disclosures about risks and uncertainties stemming from general macro-economic factors are required.
T/F: GAAP requires disclosures about the entity's ability to continue as a going concern if there is substantial doubt about the entity's ability to meet its obligations.