Chapter 2 - Matching (Revenue & Expense), Foreign Currency Accounting, and Other Financial Statement Presentations Flashcards
Under US GAAP, when is revenue from the sale of products recognized?
Date of Sale
Criteria that must be met for each element of a contract before any revenue can be recognized under GAAP
(1) Persuasive evidence of arrangement exists - Signed contract
(2) Delivery has occurred or services have been rendered - Risk & Rewards transfer
(3) Price is fixed and determinable - No price contingencies
(4) Collection is reasonably assured - Standard collection terms
Under IFRS, revenue from the sale of goods is recognized when the following conditions have been met:
(1) Revenue and costs incurred for transaction can be measured reliably
(2) Probable that economic benefits from transaction will flow to entity
(3) Entity transferred risks and rewards of ownership to buyer
(4) Entity does not retain managerial involvement
Under IFRS, what method is used to recognize revenue from the rendering of services?
Percentage of completion method
What are expired costs?
Expense on income statement - Insurance exp, COGS, period costs (selling, general & admin exp)
What are unexpired costs?
Deferred charges
How to record unearned royalty?
DR. Cash
CR. Unearned Royalty
How to record royalty when it has been earned?
DR. Unearned Royalty
CR. Earned Royalty
Revenue from a sales transaction where the buyer has the right to return the product shall be recognized at the time of sale only if what conditions are met
(1) Sale price is fixed at date of sale
(2) Buyer assumes all risks of loss
(3) Buyer has paid some form of consideration
(4) Product sold is substantially complete
(5) Amount of future returns can be reasonably estimated
When are initial franchise fees recognized?
Recognized when “substantially performed.” Generally, conditions of sale are not considered substantially performed until franchisee’s first day of operations
How should purchased intangible assets be recorded?
At cost
How should internally developed intangible assets be recorded?
Expensed because US GAAP prohibits the capitalization of R&D costs
Capitalize of Expense for costs associated with intangible assets?
Legal fees and other costs related to a successful defense of the asset
Capitalize
Capitalize of Expense for costs associated with intangible assets?
Trademarks
Expense
Capitalize of Expense for costs associated with intangible assets?
Other direct costs to secure asset
Capitalize
Capitalize of Expense for costs associated with intangible assets?
Design Costs
Capitalize
Capitalize of Expense for costs associated with intangible assets?
Goodwill from advertising
Expense
Capitalize of Expense for costs associated with intangible assets?
The cost of developing, maintaining, or restoring goodwill
Expense
Capitalize of Expense for costs associated with intangible assets?
Registration or consulting fees
Capitalize
Under IFRS, how does their treatment of research costs differ from US GAAP?
IFRS - Expense research costs, Capitalize development costs
US GAAP - Expense R&D costs
What should be done in the following situations:
- Intangible asset becomes worthless
- Intangible asset becomes impaired
- Life of intangible asset changes
- Sale of intangible asset
- Intangible asset becomes worthless - Expense
- Intangible asset becomes impaired - Expense
- Life of intangible asset changes - Recalculate amortization
- Sale of intangible asset - Calculate gain/loss
Under US GAAP, intangible assets are reported at:
Cost - Amortization & Impairment
Under IFRS, intangible assets are reported at:
(1) Cost Model = Cost - Amortization & Impairment
or
(2) Revaluation Model = FMV - Amortization & Impairment
How are revaluation gains and losses reported and what are the exceptions?
- Revaluation gains are reported in OCI and accumulated in equity as revaluation surplus, unless revaluation gains reverses previously recognized revaluation loss. In this case, revaluation gains will be reported on I/S to extent they reverse previously recognized loss.
- Revaluation loss are reported in I/S, unless revaluation loss reverses previously recognized revaluation gain. In this case, revaluation loss will be recognized in OCI and decrease revaluation surplus to extent of previously recognized revaluation gain.
How are impairments reported?
Reduce revaluation surplus to zero with further impairment losses reported in I/S
How should franchisee report initial franchise fees?
Report as intangible asset and amortize
How should franchisee report continuing franchise fees?
Expense as incurred
Expense or capitalize?
Start-up costs
Expense
What are the exceptions to expensing R&D costs?
(1) Materials, equipment, or facilities that have ALTERNATE FUTURE USES - Capitalize and depreciate over useful life
(2) R&D costs of an nature undertaken ON BEHALF OF OTHERS under a contractual arrangement - Expense as COGS
What items are not considered as R&D costs?
Routine periodic design changes to old products or troubleshooting in production stage
Marketing research
Quality control testing
Reformulation of chemical compound
Expense or Capitalize?
Computer software developed to be sold, leased, or licensed
Before technological feasibility established - Expense
Technological feasibility established –> Release for sale - Capitalize
After Sale - Amortization expense begins
How do you know technological feasibility is established?
- Detailed program design
or - Completion of work model
How to calculate amortization of capitalized software costs developed to be sold, leased, or licensed
Annual amortization is the greater of:
(1) Percentage of Revenue = Total Capitalized Amount * (Current Gross Revenue for period/Total Projected Gross Revenue for period)
(2) Straight Line = Total Capitalized Amount/Estimated Economic Life
Expense or Capitalize?
Computer software developed for internal use
Before technological feasibility established - Expense
After technological feasibility established - Capitalize
How to calculate amortization of computer software developed for internal use
Straight Line = Total Capitalized Amount/Estimate of economic life
