Chapter 2 Section 1: Timing Issues Flashcards
What is matched to what, according to the matching principle?
Expenses are matched to revenues
How do you recognized revenue under multiple element arrangements?
Allocate the fair value of the contract to each item and recognize the revenue for each item as it is earned.
What do you call cash received before it is earned?
What type of account is it?
Unearned or deferred revenue or credit
Liability - earn it or return it
Under the accrual method, when do you recognize revenue and expenses?
Revenue when earned and expenses when incurred
What do you call cash earned before it is received?
What type of account is it?
Accrued revenues
Asset
What do you call an expenses incurred before paid?
What type of account is it?
Accrued expense
Liability
Give an example of expired and unexpired costs
Expired: depreciation expense on the income statement
Unexpired: the portion of the fixed asset on the balance sheet that has not yet been expensed
What do you call an expenses paid for before it is incurred?
What type of account is it?
Prepaid expense
current asset
When is royalty revenue recognized?
When earned
What are the conditions for recognizing revenue with a right of return? (5)
Sales price is substantially fixed Buyer assumes risks of loss Buyer has paid consideration Product is substantially complete Amount of future returns can be reasonably estimated
What are the two types of fees in franchising?
Initial franchise fees
Continuing franchise fees
When are the two types of fees in franchising recognized?
Initial: when substantially performed
Continuing: when earned
Who are the two parties in a franchise relationship?
Franchisor: the one letting someone else operate the business for them
Franchisee: the one paying to operate someone else’s business
How do you record intangible assets purchased?
Capitalize at cost, plus legal and registration fees.
How do you record internally developed intangible assets?
Expensed against income when incurred - GAAP prohibits capitalizing R&D
Are there any costs that can be capitalized for internally developed intangible assets?
Legal fees related to a successful defense
Registration and consulting fees
Design costs
What happens when you have an unsuccessful lawsuit for an internally developed intangible asset?
Expense the costs and test the asset for impairment. Nothing is capitalized.
How is R&D handled for GAAP vs. IFRS?
GAAP: expense all
IFRS: expense research and capitalize development upon establishment of technological feasability
What is an example of an unidentifiable intangible asset?
How is its value calculated?
Goodwill
The difference between the cost of the group of assets acquired and the sum of the costs assigned to identifiable assets acquired, less liabilities assumed
What life is an acquired intangible amortized over?
What is the exception, and what should that be amortized over?
Its useful life
Patents are the exception - amortize over the shorter of the estimated useful life or remaining legal life
What method should generally be used to amortize intangibles?
Straight line
Is goodwill amortized?
How is it handled?
No - indefinite life
Test for impairment annually
What if an intangible becomes worthless during the year?
Write off the entire remaining cost to an expense
How do you handle impairment?
Write down the intangible and recognize an impairment loss
What are the two IFRS methods for reporting intangibles?
Cost and revaluation
Describe the Cost Model for intangibles
Intangibles are reported at cost adjusted for amortization and impairment
Describe the Revaluation Model for intangibles
Intangibles are initially recognized at cost, and then revaluated to fair value at a later revaluation date. Report at fair value, adjusted for subsequent amortization and impairment
Where are revaluation gains and losses reported?
Loss: Income Statement, unless it reverses a previous gain, which would then be in OCI
Gain: OCI (revaluation surplus - R in PUFER), unless it reverses a previous loss, which would then be on the I/S
How is impairment reported in the revaluation model?
First reduce any surplus in AOCI, and then go to the I/S
How are the different franchise fees reported by the franchisee?
Initial fees are recorded as an intangible and amortized
Continuing are expensed as incurred
How are start up costs reported?
Expense as incurred - different from tax!
What are the two methods for goodwill?
Describe both
Acquisition: goodwill is the excess of an acquired entity’s fair value over the fair value of the net assets, including identifiable intangibles
Equity: involves the purchase of a company’s stock. It is the excess of the stock purchase price over the fair value of the net assets acquired
How do you handle costs from maintaining goodwill?
Expense as incurred
What costs can be capitalized under GAAP in relation to R&D?
Material and equipment that has an alternate future use - capitalize and depreciate over their useful life, not over the life of the R&D project
R&D costs undertaken on behalf of someone else under a contractual agreement - someone is paying you to do R&D for them. Put into COGS
List four items not included in R&D
Routine design changes to old products and troubleshooting
Marketing research
Quality control testing
Reformulation of a chemical compound
Do GAAP and IFRS offer separate guidance on software?
GAAP does, IFRS does not
How does GAAP handle software?
- before technological feasibility
- after technological feasibility
- amortization basis
- balance sheet amount
Expense costs incurred until technological feasibility (completion of the plan or model)
Capitalize costs after technological feasibility, and amortize using the GREATER OF: percentage of revenue or straight line. Report at lower of cost or market.
Costs incurred to produce the product go to COGS
How is impairment handled under GAAP?
Two-step impairment test:
- carrying amount of asset vs. sum of undiscounted future cash flows
- if that shows impairment, get the amount by comparing the carrying amount to discounted future cash flows (PV) (the only step for indefinite lives and IFRS)
Where is an impairment loss reported?
As a component of income from continuing operations, unless it is related to discontinued operations.
Is the reversal of impairment losses allowed under GAAP or IFRS?
GAAP: no, unless it is being held for sale
IFRS: yes
How does IFRS test for goodwill impairment?
At the cash-generating unit level.
Compare carrying value to the recoverable amount.
Recoverable amount is the greater of FV-costs to sell or value in use
Value in use is the PV of FCF
Impairment is first allocated to goodwill, then to other assets of the CGU
