F2 Flashcards
Matching (Revenue & Expenses), Foreign Currency Accounting, and Other F.S. Presentations
Revenue Recognition: What are the four criteria that are needed? (US. GAAP)
- Persuasive evidence of an arrangement exists (Signed Contract)
- Delivery has occurred or services have been rendered (Risk-Reward transfered)
- The price is fixed and determinable- no price contingencies
- Collection is reasonably assured
Revenue Recognition (IFRS): What are the 4 categories of Revenue?
F2-4
- Sale of Goods
- Rendering of Services
- Revenue from Interest, Royaltyies and dividends
- Construction Contracts
4
IFRS: Sales from goods are recognized?
F2-4
- Revenue/ costs incurred for the transaction can be MEASURED RELIABLY
- Probable that ECONOMIC BENEFITS from the transaction will flow to the entity
- The entity has transferred to the buyer the significant RISKS AND REWARDS
- The entity does not retain managerial Involvement to the degree associate with ownership or control over the goods sold
What is the Correct Entry for collecting and recognizing Royalties?
F2-9
- Debit: Cash
- Credit: Unearned Royalty
- Debit Unearned Royalty
- Credit Earned Royalty.
Recognition of Right to Return Sale?
F2-10
Must meet five conditions:
- The sales price is substantially fixed at the date of the 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.
Franchise accounting involves 2 types of Fees?
F2-11
- **Initial Fees **- Fees are paid by the franchisee for receiving initial services from the franchisor
- **Service Fees **- Fees should be reported by the Franchisor as revenue when they are earned.
3 Franchisor
Earned revenue for Franchise accounting?
F2-11
- Franchisor has no obligation to refund any payment
- Initial services required of the franchisor have been performed
- All other conditions of the sale have been met
Intangible assets purchased from other entities should be?
Recorded at costs (US GAAP)
Internally Developed intangible Assets
Expensed. (US GAAP) does not allow for the capitalization of R & D
4
Costs that can be capitalized and are specifically identifiable.
- Legal Fees and other costs related to a Successful Defense of the Asset
- Registration or consulting fees
- Design Costs (Trademark)
- Other Direct Costs to secure the Asset
5
IFRS: intangible asset capitalization exceptions?
Research costs must be expensed, but an intangible asset arising from development is capitalized if:
- Technological Feasibility has been established
- The entity intends to complete the intangible asset
- The entity has the ability to use or sell the intangible
- The intangible will generate future economic benefits
- Has the resources to complete the development.
Capitalization of Costs to acquire an intangible.
- The amount of cash disbursed OR the FV of the other assets
- The PV of amounts to be paid for liabilities incurred
- The FV of consideration received for stock issued
A patent is amortized over…?
SHORTER of Estimated life OR Remaining legal life
Goodwill must be?
Tested for impairment each year
Impairment of intangible asset (GAAP)?
Compare between the difference of Fair Value and Undiscounted cash flows.
FV > Undiscounted Cash flows
Reduce Book value to Fair value and the difference is the impairment to be recognized in the period.
Under IFRS, impairment is tested?
For a cash generating unit.
Under GAAP, impairment is tested under?
Each reporting unit
Calculation
Impairment of Goodwill (IFRS)
Recoverable Amount
= GREATER of
FV Less costs to sell OR Value in use (PV cash flow)
Less: Carrying Value
Equals: Impairment loss amount.
Convert from Cash to Accural
- Add increases in current assets
- Subtract decreases in current assets
- Add decreases in current liabilities
- Subtract increases in current liabilities.
Formula
Completed contract calculation?
Step 1: Gross Profit
Contract Price - Total Costs to Complete
Step 2: % of Completion
% = Cost to date/Estimated costs of contract
Step 3: Gross profit earner
Step 1 x Step 2 = Profit to Date (PTD)
Step 4: Gross Profit for current year:
PTD - Prior PTD = Current GP
Net Asset of Liability Formula
Completed contract statement of financial position issues?
Cumulative costs incurred
Add: cumulative gross profit recognized
Less: cumulative billings
Net Asset of Liability
Installment Sales: When to recognize revenue?
Only when cash is actually collected, in proportion.
A/R
Installment Sales: Balance Sheet representation?
Account Receivable
Less: Deferred GP
Equals: A/R Balance
Deferred GP is a contra account to Receivables.
Cost Recovery method: When to recognize revenue?
At the time of sale, expected profit is recorded as Deferred GP.
Cash collections are first applied to recover product costs. Only after all costs are recovered is Profit recognized.
Most conservative method.
Only use Cost Recovery or Installment Sales when?
There’s NO reasonable basis for estimating recovery, or revenues collectibility.
4, Boot Paid/Received
Non-monetary exchanges: When to recognize gains?
- No Boot = No Gain
- Boot is Paid = No Gain
- Boot Received is LESS than 25% = Recognize Proportional Gain
- Boot Received is 25% or MORE = 100% Gain
Non monetary Exchanges: Less than 25% rule?
Recorded Gain = (Boot / Consideration Given) x Total Gain
Total Gain = FV Asset Given Up - NBV
4 simple definitions
Reporting change in prices
- Historical cost - actual exchange value $ when asset acquired/liability assumed
- Current cost (replacement cost) - cost incurred at present time. Use recoverable amount if lower.
- Nominal $ - unadjusted for changes in purchasing power
- Constant $ - $ restated based on CPI ratio calculation
4 combinations
Measurement Methods and Current cost Determination
- Historical Cost/Nominal Dollars: Neither.
- Historic Cost/ Constant Dollars: Adjusts for Inflation
- Current Cost/Nominal Dollars: Adjusts for Appreciation
- Current Cost/Constant Dollars: Adjusts for either Appreciation or Inflation.
Exchange Rate Representations
(Foreign Currency Translation)
Direct method: Domestic Price for 1 unit of Currency
Indirect Method: Foreign Price for 1 Unit of Domestic Currency (Euro = $)
($= Euro)
Forward Exchange Rate
**A Bet: **exchanging currencies now for a Future Amount
Historical Exchange Rate
Use Frequently:
Rate in effect at the date of issuance of stock or acquisition of Assets
Weighted Average Rate
Used for Financial Statements:
Takes into account the Exchange rate fluctuations at the during the period.
3
Function Currency qualifications?
- The foreign operations are relatively self-contained and integrated within the country
- Daily operations of the Foreign unit do not depend on the Currency of the domestic parent
- Economy of the foreign unit is not highly inflationary - 100% over 3 years
Remeasurement method
“Dysfunctional”
Financial statements of the Foreign Unit are not in a functional currency.
Remember the CHART!
Foreign Curency: Remeasurement (Temporal) vs. Translation (Current Rate) Methods
Balance Sheet Presentation
Remeasurement (Temporal)
- Monetary A&L = Current/Year-end rate
(A/R, N/R, LTD) - Non-monetary A&L&E= Historical Rate
(Inventory, Fixed Assets, Common stock)
Translation (Current)
- Monetary A&L = Current
- Non-monetary A&L = Current
- Common Stock = Historical
Remember the CHART!
Foreign Curency: Remeasurement (Temporal) vs. Translation (Current Rate) Methods
Income Statement Presentation
Remeasurement (Temporal)
- Revenue, SG&A, Tax = W. Average
- Cost of Goods Sold = Historical
- Depreciation, Amortization = Historical
Translation (Current)
- Revenue, SG&A, Tax = W. Average
- Cost of Goods Sold = W. Average
- Depreciation, Amortization = W. Average
What is a common modification used to prepare modified cash basis financial statements?
Capitalizing inventory
Monetary Assets & Liabilities
Fixed or denominated in $ regardless of changes in specific prices or general price level.
Inflation
Monetary Liability = Purchase Power Gain
Monetary Asset = Purchase Power Loss
Cash, A/R (Allowance), L/T Receivable
A/P, N/P, Accrued expense, Bond payable
Non-monetary Assets & Liabilities
Fluctuate in value with inflation/deflation, affected by CPI.
Marketable common stock, inventory, Investment in subsidiary, PP&E (depreciation), Intangible assets
Deferred charges/credits, preferred and common stock