Chapter 2 Section 1: Timing Issues

Question 1

What is matched to what, according to the matching principle?

Answer 1

Expenses are matched to revenues

Question 2

How do you recognized revenue under multiple element arrangements?

Answer 2

Allocate the fair value of the contract to each item and recognize the revenue for each item as it is earned.

Question 3

What do you call cash received before it is earned?

What type of account is it?

Answer 3

Unearned or deferred revenue or credit

Liability - earn it or return it

Question 4

Under the accrual method, when do you recognize revenue and expenses?

Answer 4

Revenue when earned and expenses when incurred

Question 5

What do you call cash earned before it is received?

What type of account is it?

Answer 5

Accrued revenues

Asset

Question 6

What do you call an expenses incurred before paid?

What type of account is it?

Answer 6

Accrued expense

Liability

Question 7

Give an example of expired and unexpired costs

Answer 7

Expired: depreciation expense on the income statement
Unexpired: the portion of the fixed asset on the balance sheet that has not yet been expensed

Question 8

What do you call an expenses paid for before it is incurred?

What type of account is it?

Answer 8

Prepaid expense

current asset

Question 9

When is royalty revenue recognized?

Answer 9

When earned

Question 10

What are the conditions for recognizing revenue with a right of return? (5)

Answer 10

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

Question 11

What are the two types of fees in franchising?

Answer 11

Initial franchise fees

Continuing franchise fees

Question 12

When are the two types of fees in franchising recognized?

Answer 12

Initial: when substantially performed
Continuing: when earned

Question 13

Who are the two parties in a franchise relationship?

Answer 13

Franchisor: the one letting someone else operate the business for them
Franchisee: the one paying to operate someone else’s business

Question 14

How do you record intangible assets purchased?

Answer 14

Capitalize at cost, plus legal and registration fees.

Question 15

How do you record internally developed intangible assets?

Answer 15

Expensed against income when incurred - GAAP prohibits capitalizing R&D

Question 16

Are there any costs that can be capitalized for internally developed intangible assets?

Answer 16

Legal fees related to a successful defense
Registration and consulting fees
Design costs

Question 17

What happens when you have an unsuccessful lawsuit for an internally developed intangible asset?

Answer 17

Expense the costs and test the asset for impairment. Nothing is capitalized.

Question 18

How is R&D handled for GAAP vs. IFRS?

Answer 18

GAAP: expense all
IFRS: expense research and capitalize development upon establishment of technological feasability

Question 19

What is an example of an unidentifiable intangible asset?

How is its value calculated?

Answer 19

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

Question 20

What life is an acquired intangible amortized over?

What is the exception, and what should that be amortized over?

Answer 20

Its useful life

Patents are the exception - amortize over the shorter of the estimated useful life or remaining legal life

Question 21

What method should generally be used to amortize intangibles?

Answer 21

Straight line

Question 22

Is goodwill amortized?

How is it handled?

Answer 22

No - indefinite life

Test for impairment annually

Question 23

What if an intangible becomes worthless during the year?

Answer 23

Write off the entire remaining cost to an expense

Question 24

How do you handle impairment?

Answer 24

Write down the intangible and recognize an impairment loss

Question 25

What are the two IFRS methods for reporting intangibles?

Answer 25

Cost and revaluation

Question 26

Describe the Cost Model for intangibles

Answer 26

Intangibles are reported at cost adjusted for amortization and impairment

Question 27

Describe the Revaluation Model for intangibles

Answer 27

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

Question 28

Where are revaluation gains and losses reported?

Answer 28

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

Question 29

How is impairment reported in the revaluation model?

Answer 29

First reduce any surplus in AOCI, and then go to the I/S

Question 30

How are the different franchise fees reported by the franchisee?

Answer 30

Initial fees are recorded as an intangible and amortized

Continuing are expensed as incurred

Question 31

How are start up costs reported?

Answer 31

Expense as incurred - different from tax!

Question 32

What are the two methods for goodwill?

Describe both

Answer 32

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

Question 33

How do you handle costs from maintaining goodwill?

Answer 33

Expense as incurred

Question 34

What costs can be capitalized under GAAP in relation to R&D?

Answer 34

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

Question 35

List four items not included in R&D

Answer 35

Routine design changes to old products and troubleshooting
Marketing research
Quality control testing
Reformulation of a chemical compound

Question 36

Do GAAP and IFRS offer separate guidance on software?

Answer 36

GAAP does, IFRS does not

Question 37

How does GAAP handle software?

• before technological feasibility
• after technological feasibility
• amortization basis
• balance sheet amount

Answer 37

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

Question 38

How is impairment handled under GAAP?

Answer 38

Two-step impairment test:

1. carrying amount of asset vs. sum of undiscounted future cash flows
2. 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)

Question 39

Where is an impairment loss reported?

Answer 39

As a component of income from continuing operations, unless it is related to discontinued operations.

Question 40

Is the reversal of impairment losses allowed under GAAP or IFRS?

Answer 40

GAAP: no, unless it is being held for sale
IFRS: yes

Question 41

How does IFRS test for goodwill impairment?

Answer 41

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