Matching Flashcards
Classifying as R&D Expenses
Before technological feasibility is established computer software development costs are expensed as research and development.
Proper Amortization of Capitalized Software
Amortization of capitalized software costs equals the greater of straight-line amortization or sales revenue from the software for the period ÷ total projected sale
Goodwill impairment
Under IFRS, goodwill impairment is calculated by using a one-step test at the cash generating unit level in which the carrying value of the cash generating unit is compared to the cash generating unit’s recoverable amount ($45,000 − $32,000 = $13,000). An impairment loss is then recognized to the extent that the carrying value of the cash generating unit (including goodwill) exceeds the recoverable amount of the cash generating unit impairment loss, which is $13,000. This amount is first allocated to goodwill. Any remaining impairment loss would be allocated on a pro rata basis to the other assets of the cash-generating unit.
IFRS Goodwill Impairment
Under IFRS, goodwill cannot be looked at separately. Goodwill impairment is calculated by using a one-step test at the cash generating unit level in which the carrying value of the cash generating unit is compared to the cash generating unit’s recoverable amount. An impairment loss is then recognized to the extent that the carrying value of the cash generating unit (including goodwill) exceeds the recoverable amount of the cash generating unit impairment loss
Comparing Cash to Accrual for AR and Accrued Expenses
A net decrease in A/R means cash collected exceeds revenue recognized on the accrual basis. This would mean higher cash basis income than accrual basis income. This yields a “no” for Accounts Receivable.
A net decrease in Accrued Expenses means cash paid to reduce Accrued Expenses was more than the accrual basis expense recorded. This would mean a higher expense under the cash basis than under the accrual basis. This yields a “yes” for Accrued Expenses.
Internal Use of Software development
Under U.S. GAAP, Research and development includes costs incurred prior to technological feasibility for developed software that is to be sold, leased, or marketed. This software is for internal use, unrelated to production and is not considered research and development. Market research is also not research and development because it is not aimed at discovery of new knowledge to develop a new product or service.
Initial Fees for Franchising
The franchisor should report revenue from initial franchise fees when all material conditions of the sale have been “substantially performed.” Macklin Co. will recognize the entire initial fee in the current year.
What is classified as R&D
Research is the planned efforts of a company to discover new information that will help either create or improve a new product, service, process, or technique or one in current use. Items not considered research and development include: Routine periodic design changes to old products or troubleshooting in production stage, marketing research, quality control testing and reformulation of a chemical compound.
Recording Revenue
when there is an unlimited right of return, nothing should be recorded as sales revenue unless four conditions are satisfied. These conditions are the following:
The sales price is substantially fixed (it seems like it is in this question).
The buyer assumes all risk of loss (no information).
The buyer has paid some form of consideration (no information).
The amount of returns can be reasonably estimated (which they can in this question).
US GAAP Rules of Impairment
Step 1: Identify potential impairment by comparing the fair value of each reporting unit with its carrying amount, including goodwill.
Assign assets acquired and liabilities assumed to the various reporting units. Assign goodwill to the reporting units.
Determine the fair values of the reporting units and of the assets and liabilities of those reporting units.
If the fair value of a reporting unit is less than its carrying amount, there is potential goodwill impairment. The impairment is assumed to be due to the reporting unit’s goodwill since any impairment in the other assets of the reporting unit will already have been determined and adjusted for (other impairments are evaluated before goodwill).
If the fair value of a reporting unit is more than its carrying amount, there is no goodwill impairment and Step 2 is not necessary.
Step 2: Measure the amount of goodwill impairment loss by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.
Allocate the fair value of the reporting unit to all assets and liabilities of the unit. Any fair value that cannot be assigned to specific assets and liabilities is the implied goodwill of the reporting unit.
Compare the implied fair value of the goodwill to the carrying value of the goodwill. If the implied fair value of the goodwill is less than its carrying amount, recognize a goodwill impairment loss. Once the goodwill impairment loss has been fully recognized, it cannot be reversed.
Treatment of Impairment Losses
Under U.S. GAAP, subsequent reversal of intangible asset impairment losses is prohibited unless the intangible asset is held for sale.
Define the Matching Principle
Expenses are necessarily incurred to generate revenues. All expenses incurred to generate a particular revenue should be recorded in the same period in which the revenue is recorded.
costs to develop computer software for ultimate sale
All relevant costs incurred before technological feasibility is established should be expensed as research and development expenditures. After technological feasibility is established, all relevant costs are capitalized until the product is released for sale. At that point all relevant costs are included in “Inventory” (normal product costs) and charged to “Cost of Goods Sold” when sold.
IFRS Software Development
Research expenditures must be expensed under IFRS (and U.S. GAAP). Staff training and administrative salaries must also be expensed.
IFRS One-Step Test
Under IFRS, the goodwill impairment test is a one-step test in which the carrying value of a cash-generating unit ( CGU) is compared to the CGU’s recoverable amount, which is the greater of the CGU’s fair value less costs to sell and its value in use (PV of future cash flows expected from the CGU).