Becker Far 2 Flashcards
In general, what are the criteria for revenue recognition under US Gaap?
Earned and realized or realizable. The following 4 criteria must be met before revenue can be recognized:
- Persuasive evidence of an arrangement exists.
- Delivery has occurred or services have been rendered.
- The price is fixed and determinable.
- Collection is reasonably assured.
What are 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 the economic benefits 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 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 and 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 & IFRS.
Internally developed intangible assets:
Legal fees, costs of successful defense, 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 must be expensed, but development costs may be capitalized if they meet certain criteria.
How are intangible assets reported under US GAAP and IFRS?
US GAAP:
Reported at cost less amortization (finite life intangibles only) and 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 contractual amounts of future services to be performed under a franchise agreement to be accounted for by the 1) the franchisor and 2) the franchisee
They should be recorded at their present value as unearned revenue by the franchisor until earned 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.
Define goodwill.
- Excess of the fair value of a subsidiary over the fair value of the subsidiary’s net assets.
- Costs of maintaining and/or developing goodwill cannot be capitalized.
What is the maximum period over which and 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 & IFRS?
US GAAP:
Costs should be expensed as incurred unless an 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 expensed. Development costs must be capitalized if they meet certain criteria.
List some items not considered research & development costs.
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 US GAAP?
After technological feasibility 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:
Percent of Revenue Method:
Total capitalized amount x Current gross revenue for the period/Total projected gross revenue for the 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-lien 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
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 assets Fair value 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.
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 two-step process:
- Identify potential impairment by comparing the fair value of each reporting unit with its carry 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 necessary to perform the two step goodwill impairment test.
How is goodwill impairment analyzed under IFRS?
Good will 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 & 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
_________________ x Total est. gross profit
Total estimated cost of contract
-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
When are profits recognized under the cost recovery method?
Only after all costs have been recovered.
How are gain/losses on nonmonetary exchanges recognized under US GAAP?
Exchange has commercial substance-always recognize gains/losses on exchange equal to difference between the FV of what is given up and the carrying value of what is given up
Exchange doesn’t have commercial substance or the new asset’s fair value is not determinable (and FV of asset given up 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 > 25% of total compensation, all gains/losses recognized by both parties to the exchange just as in a monetary transaction that has commercial substance.
How are gains/losses or nonmonetary exchanges recognized under IFRS?
- Exchange of similar assets- no gains recognized. Losses recognized in full.
- Exchange of dissimilar assets- All gains/losses recognized.
When will an asset exchange have commercial substance under US GAAP?
When entity expects a change in future cash flows as a result of exchange & that change to be material relative to the FV of assets exchanged.
In a nonmonetary exchange, what is the basis of the new asset under US GAAP?
Exchange that has commercial substance (or 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.
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 & 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 & liabilities that fluctuate in value with inflation/deflation.
Examples: inventories; property, plant & equipment; and capital stock. These items need to be restated to constant dollars.
Identify 2 foreign currency activities
Foreign currency translations
Foreign currency transaction
What is an entity’s functional currency under US GAAP?
It’s the currency of primary economic environment in which they entity operates. 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?
To restate financial statements denominated in the functional currency to the reporting currency
When is remeasurement method used?
To restate financial statements from 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 & Liabilities: Current exchange rate
Common stock & APIC: Historical rate
Revenue & Expenses: Weighted average exchange rate for the period
Identify 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 remeasurement gains/losses reported in the financial statements?
they are recognized on the income statement
Where are translation adjustments reported in the financial statements?
In other comprehensive income.
They are treated as unrealized gains/losses.
State 2 types of foreign currency transactions.
- Operating transactions, such as importing, exporting, borrowing, lending, and investing transactions
- Forward exchange contracts, which are agreements to exchange two different currencies at a specific future date and 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
What are general guidelines for OCBOA financial presentation?
- Different titles from accrual basis financial statements.
- Required financial statements are the equivalent of the accrual basis balance sheet and income statement.
- Financial statements should explain changes in equity accounts.
- A statement of cash flows is not required.
- Disclosures should be similar to GAAP financial statement disclosures.
