F2 Flashcards
In general, what are the criteria for revenue recognition under US GAAP?
Earned and realizable. The following four 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 the four categories of revenue transaction under IFRS and what are the common revenue recognition criteria for those categories?
- Sale of goods
- rendering of services
- revenue from interest, royalties, and dividends
- construction contracts
Common revenue recognition criteria include:
* revenue and costs can be reliably measured
* it is probable that economic benefit 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 risk 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 transfered
- 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 an example of deferred revenue recognition
How are purchased intangible assets and internally developed intangible assets recorded under US GAAP and IFRS
Purchase intangible assets - recorded at cost, including legal and registration fees, under US GAAP and IFRS
Internally developed intangible assets:
- Legal fees, costs of successful defence, 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 costs 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 cost model (same as US GAAP) or the revaluation model. Under the revaluation model, reported at fair value on revaluation dates less subsequent amortization and impairment
How should the contractual amounts of future services to be performed under a franchise agreement be accounted for by 1) the franchisor and 2) the franchisee?
They should be recorded at their present value as unearned revenue by the franchisor until earned and 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 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 vale of the subsidiary’s net assets
- costs of maintaining and/or developing goodwill cannot be capitalized
What is the maximum period over which an 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 and IFRS?
US GAAP-
Research and development costs should be expensed as incurred unless an expenditure is for capital assets that have alternative future uses, or for research and development undertaken of behalf of others under a contractual arrangement
IFRS -
Research costs must be expensed. Development costs may be capitalized if they meet certain criteria
List some items NOT considered research and development costs.
- routine periodic design changes
- marketing research
- quality control testing
- re performance of a chemical compound
When should the cost of developing computer software for resale, lease, or licensing be capitalized under US GAAP?
After technological feasibiilty 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:
1) Percent of Revenue Method:
total capitalized amount x (current gross revenue for
the period/ total projected gross revenue for product)
2) 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-line basis
What is the test of recover-ability 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 asset’s fair values less costs to sell and the asset’s value in use (PV of future cash flows)
