F2 Flashcards
Revenue Recognition
GAAP
Revenue is recognized when it is realized (or realizable) and when it is earned
Requirements: all 4 must be met
- persuasive evidence of an arrangement exists (signed contract)
- delivery has occurred or services has been rendered (risks and rewards has transferred to customers)
- the price is fixed and determinable (no price contingencies)
- collection is reasonably assured
Rev from sale of Products or Disposal of Assets is recognized on
- date of sale
- sale when delivery or setting aside of goods and/or transfer of title
Rev from allowing others to Use assets is recognized
- as time passes
Rev from performance of Services is recognized
- when rendered
Revenue Recognition
IFRS
Sale of Goods recognized when all met
- revenues and costs can be measured reliably
- probable that economic benefits will flow to entity
- transferred significant risks and rewards
- entity does not retain managerial involvement
Services: use % of completion method when outcome of transaction can be measured reliably when:
- revenue and costs can be measured reliably
- probable that economic benefits will flow to entity
- stage of completion of transaction at the end of the reporting period can be measured reliably
Revenue from Interest, Royalties, and Dividends
- revenue can be measured reliably
- probably economic benefit will flow to entity
Construction Contracts
- revenue and costs can be measured reliably
- probable economic benefit will flow to entity
- both contract cost to complete the contract and stage of contract can be measured reliably
- expected loss on construction contract expensed immediately
Multiple Element Arrangements
GAAP
when sales contract includes multiple products or services, fair value of contract allocated to the separate elements.
- revenue recognized separately for each element based on revenue recognition criteria appropriate for each element
Exceptions and Other Special Acct Treatment
Deferred Credit
- when cash is received before earned, a deferred credit (unearned rev or deferred rev) is reported
- earn it or return it
- liability
- unearned interest, rental, royalty
Installment Sale
Cost Recovery Method
Nonmonetary Exchanges
Involuntary Conversions
Net Method of Acct for Trade (Sales) Discount
% of completion contract acct
Expenses
reduction of assets or increases in liabilities (possibly both) from main operations
- recognized according to matching principle
Realization
when entity obtains cash or right to receive cash from sale of asset or converted noncash resource into cash
- real world
Recognition
actual recording of of transactions and events in FSs
Matching Principle
expenses must be recognized in the same period the related revenue is recognized (when it is practical)
- simultaneous or combined recognition of revs and exps that results from same transaction/event
- accrual accounting
Accrual Accounting
process of employing Revenue Recognition and Matching Principle for recognition of revs and exps
- required by GAAP
- income statement impact, not cash impact
Deferral
when is cash is received or expended but not recorded for FS purposes
- no current IS impact/BS impact, just cash impact
- typically results in recognition of liability or prepaid
Accrued Assets and Liabilities
Accrued Assets/Revenue
- revenue recognized through passage of time, but not yet received
- dr: acct receivable, cr: accrued revenue
Accrued Liab/Expenses
- recognized through passage of time, but not yet paid
- dr: accrued expense, cr: accrued liability
Estimated Liabilities
- recognition of probably future charge that results from previous act
- e.g. est liab for warranties, trading stamps, coupons
- dr: accrued expense, cr: accrued liability
Expired Cost
costs that expire during the period and have no future benefit
- expense on IS
- insurance
- COGS when sale took place
- period costs
Unexpired Cost
should be capitalized and matched against future revenues
- stay on balance sheet (for now) as asset or deferred charge
- if future rev is uncertain or there is no residual value, then should be expensed as expired costs
Prepaid Expenses
- current asset
- dr: prepaid expense, cr: cash (BS only)
- becomes an Expired Cost, where it gets charged on IS
“current” if prepaid related to 12 months or less
- minimum operating cycle is 12 months
Deferred Charges
- dr: deferred charge, cr: cash or asset (BS only)
- is an Unexpired Cost and becomes Expired
Deferred Credits
Revenue Recognition
unearned revenue or deferred revenue
- dr: cash, cr: unearned/deferred revenue (BS only)
- future income contracted for and/or collections in advance
- not yet been earned by passage of time or other criteria
- located in liability section of BS (earn it or return it)
Royalty Revenue
Revenue Recognition
recognized when earned
- good example F2-9
JEs
- dr: cash, cr: unearned royalty (paid in advance, BS only)
- dr: unearned royalty, cr: earned royalty (earned, IS impact)
Unearned Revenue
Revenue Recognition
revenue received in advance is recorded as a liability
- earn it or return it
- prepaid increased unearned, earning decreases
Revenue Recognition when Right of Return Exists
rev recognized at time of sale only if requirements are met
- sales price is substantially fixed at date of sale
- buyer assumes all risk of loss bc goods are in their possession
- buyer has paid consideration
- product sold is substantially complete and
- amount of returns can be reasonably estimated
not a contingent sale
Franchises
Initial Franchise Free
- revenue when substantially performed
- paid by franchisee for initial services from franchisor
Continuing Franchise Fee
- revenue when earned
- usually based on % of revenue
- mgmt training, promotion, and legal assistance
Franchisor Accounting
Unearned Rev
- initial franchise fee (not yet earned)
- prepaid continuing franchise fee
- unearned rev recognized when substantial performance has occurred
Earned Rev
- substantial performance means:
1. franchisor has no obligation to refund any payment
2. initial service req by the franchisor has been performed
3. all other conditions have been met
- GR: not substantially performed until the franchisee’s first day of operations
F2-11 a lil more~
Classification of Intangible Assets
Expense Recognition
Identifiable
- patents, copyrights, franchises, trademarks, and goodwill are common
- may be either specifically identifiable or not (goodwill)
Manner of Acquisition
- Purchased Intangible Asset: record at cost
+ capitalize legal and registration fees
- Internally Developed Intangible: expense
+ exception, certain costs can be capitalized
a. legal fees and other costs related to successful defense (unsuccessful is expensed and tested for impairment)
b. registration or consulting fees
c. design costs and
d. other direct costs to secure the asset
GAAP vs IFRS
- for IFRS, research is expensed but development if demonstrates all:
a. technological feasibility
b. intends to complete the intangible
c. ability to use or sell the intangible
d. intangible will generate future economic benefit
e. adequate resources available to complete development
Capitalization of Costs
Expense Recognition
Cost is measured by
- amt of cash disbursed or FV of other assets distributed
- the PV of amts to be paid for liabilities incurred and
- the FV of consideration received for stock issued
- cost may be determined by either FV of consideration given or by property acquired, whichever is more clearly evident
Cost of Unidentifiable Intangible Assets is measured by
- diff b/w cost of group of assets or enterprise acquired and the sum of the costs assigned to identified assets, less liabilities assumed
- the cost of identifiable assets is not included in goodwill
Amortization
Expense Recognition
value of intangible assets eventually disappears, therefore should amortize over period estimated to benefit
- must have finite life
Method
- straight line method
- method and estimated useful life disclosed in notes
Goodwill
- impairment approach
- no amortization, indefinite life
Worthless
- expense
Impairment
- write down and recognize impairment loss
- expense
Change in Useful Life
- recalculate amortization
Sale
- calculate gain/loss
- sale price minus carrying value
Tax
- amortize over 15 years
- creates temporary difference
Valuation
IFRS
Expense Recognition
under IFRS, intangible assets can be reported under cost model or revaluation
Cost Model
- intangible assets are reported at cost adjusted for amortization (for finite life intangibles) and impairment
Revaluation Model
- if one asset w/i a class is revalued, then all the assets in the class have to be revalued*
- initially recognized at cost, then revaluated to FV at subsequent revaluation date and adjusted for subsequent amortization and impairment
Revaluation Losses
- recorded on IS
- exception: revaluation loss that’s reversing a reval gain is recognized in OCI and reduces revaluation surplus in AOCI
Revaluation Gains
- recorded in OCI
- exception: if reversing a previous reval loss, recognize on IS
Impairment
- impairment first reduces any revaluation surplus in AOCI to 0 then further losses recorded on income statement
Franchisee Accounting
Expense Recognition
Initial Franchise Fee
- intangible asset and amortize
Continuing Franchise Fee
- expense as incurred
- expense to franchisee and revenue to franchisor in period incurred
Start Up and Organizational Costs
Expense Recognition
For Book
- expensed when incurred
- not capitalized as an intangible asset, expensed immediately
Tax
- 5,000 + 180 month amortization
- reduced over 50,000
Goodwill
Calculation
- Acquisition Method: goodwill is the excess of an acquired entity’s FV over the FV of the asset’s net assets, including identifiable intangibles
- Equity Method: for stocks, goodwill is excess of purchase price over FV of net assets
Maintaining Goodwill
- expense
- for maintaining, developing, or restoring goodwill
- also internally generated goodwill is expensed
Research and Development Cost
Expense Recognition
GAAP
- expense
- exceptions: don’t expense
a. materials, equipment, or facilities that have alternative future use (then you capitalize and depreciate)
b. research and develop cost taken on behalf of others under a contractual agreement
GAAP vs IFRS
- for IFRS, research must be expensed by development may be capitalized if certain criteria met
Computer Software Development Costs
Expense Recognition
GAAP vs IFRS
- IFRS doesn’t have separate computer software development cost so do it by their RandD rules
more in other cards
Software to be Sold, Leased, or Licensed
Computer Software Development Costs
Technological Feasibility established upon completion of
- a detailed program design or
- completion of a working model
Accounting for Costs
- expense costs incurred until technological feasibility has been established
- capitalize costs incurred after up to the point that the product is released for sale: coding, testing and producing product masters*
a. Amortization of Capitalized Software Costs
annual amortization is greater of:
1) % of revenue = total capitalized amount * (current gross rev for period / total projected gross rev)
2) straight line = total capitalized amount * (1 / estimated economic life)
- inventory: costs incurred to actually produce the product are product costs charged to inventory
Balance Sheet
- capitalized software costs are reported at lower of cost or market (NRV)
Computer Software Developed Internally or Obtained for Internal Use Only
- expense costs incurred for preliminary project state and cost incurred for training and maintenance
- capitalize costs incurred after preliminary project state (similar to technological feasibility)
- capitalized costs amortized on straight line basis
- if previously developed for internal use, but sold later then proceeds should be applied first to carrying amount of software, then recognized as revenue after
- change mind
- cost recovery system
Impairment of Intangible Assets other than Goodwill
GAAP
W Finite Lives
- 2 step impairment test
1. determine impairment using undiscounted future cash flows
2. amount of impairment use fair value - if no fair value, then use discounted cash flows
W Indefinite Life
- 1 step impairment test
- use step 2 only
Reporting an Impairment Loss (IDA)
- component of income from continuing operations
- unless related to discontinued operations
- restoration of previous impairment losses is prohibited, unless the asset is held for disposal
GAAP vs IFRS
- IFRS only uses step 2
- recoverable amt is greater of asset’s FV less cost to sell or PV of future cash flows expected
- allows reversal of impairment losses
Goodwill Impairment
GAAP
goodwill impairment is calculated at a reporting unit level
- impairment exists when carrying amount of the reporting unit of goodwill exceeds its fair value
Definition of Reporting Unit
- separate cash flows
- mgmt regularly reviews it
- operating segment or one level below
Evaluation of Goodwill Impairment
- step 1: identify potential impairment by comparing the fair value of each reporting unit with its carrying amount, including goodwill
- step 2: measure the amt of goodwill impairment loss by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill
PCC
- *amortize goodwill straight line over 10 years or less
- make an acct policy election to test for goodwill impairment when a triggering event occurs
IFRS vs GAAP
- IFRS tests at cash generating unit (CGU) level, lower level than GAAP
- one step test: compare carrying value of CGU to recoverable amount (greater of FV minus cost to sell and value in use)
- impairment loss first allocated to goodwill then other assets in CGU
Correcting and Adjusting Accounts
Objective is to Match Expenses against Revenues
- take credit for goods things on IS
Completed Contract Method
GAAP only
recognizes income only on completion (or substantial completion) of the contract
- substantially complete if remaining costs are insignificant
Requirements
- difficult to estimate cost of contract in progress
- there are many contracts in progress so about an equal number are completed in each year and an unequal recognition of income does not result
- projects are of short duration and collections are not assured
GAAP vs IFRS
- can’t be used for IFRS
- for IFRS % of completion has to be used unless final outcome can’t be reasonably estimated, then use cost recovery method
- cost recovery, rev can only be recognized to extent cash collected exceeds costs incurred
Balance Sheet Presentation
Completed Contract Method
excess of accumulated costs over related billing should be in BS as current asset, and excess of accumulated billing over related cost should be a current liability
- if more than 1 contract, should be separately stated on BS
Current Asset Account
- due on account (receivable)
- “costs (+estimated gains/earnings?) of uncompleted contracts in excess of billings” sometimes called “construction in progress”
- like inventory
Current Liability Account
- progress billings on uncompleted contracts in excess of cost + estimated gains/earnings
- excess billings or retainer or deposit
Accounting for the Completed Contract Method
- applicable OH and direct costs should be charged to construction in progress (an asset)
- billings and/or cash received should be credited to advances on construction progress account (a liability)
- the net of these two ^ is the current asset/liability
- classified as current bc of the current operating cycle concept (12 months)
- losses should be recognized in full in the year they are discovered (rule of conservatism)
- gross profit = contract price - total cost
Advantages and Disadvantages
Completed Contract Method
advantage: based on final results rather than estimates
disadvantage: doesn’t reflect matching principle
Determination of Revenues Recognized
% of Completion Method
GAAP and IFRS
income recognized is the % of estimated total income either:
- cost incurred to date / total expected costs = % of job “earned” or
- another way to measure % of completion
~ during early stages, all or a portion of items such as materials not used or subcontract costs may be excluded in determining the % of completion
Losses
% of Completion Method
provision for loss should be made when current estimates of the total contract cost indicates a loss
- rule of conservatism
~ if loss on contract is related to group of contracts, may treat as unit in determining losses
~ income for % of completion measured at various stages, not ordinarily interim
Balance Sheet Presentation
% of Completion Method
Current Asset Account
- due on accounts (receivables)
- costs and estimated gains/losses** of uncompleted contracts in excess of progress billings, aka “construction in progress”
Current Liability Account
- progress billings in excess of cost and estimated earnings on uncompleted contracts
Advantages and Disadvantages
% of Completion Method
advantages: accurate reporting of status and recognition of income
disadvantages: using estimates
Accounting for % of Completion Method*
- accrual method
step 1: gross profit = contract price - estimated total cost
step 2: % of completion = total costs to date / total estimated cost of contract
step 3: gross profit earned to date (PTD) = gross profit % * % of completion
step 4: gross profit earned for the year = PTD end of year - PTD beginning of year
- construction in progress includes construction expense and gain/loss*
- ** loss rule when total est cost of contract > contract price
- an estimated loss on the total contract is recognized immediately in the year it is discovered
- however, any gross profit or loss reported in prior years must be adjusted for when calculating the total estimated loss
Accounting for Installment Sales*
- cash method
- used when there is no reasonable basis for estimating the degree of collectibility
gross profit = sale - COGS
gross profit % = gross profit / sale
earned gross profit = cash collections * gross profit %
deferred gross profit = installment receivable * gross profit %
- the deferred gross profit is a contra asset*, later gets dr. and take off the BS and cr. realized gross profit on installment sales to put into IS
Cost Recovery Method
- no profit is recognized on a sale until all costs have been recovered
- at the time of sale, the expected profit on the sale is recorded as deferred gross profit
- cash collections are first applied to recovery of product costs
- then collections after all costs have been recovered are recognized as profit
- dr. cash, cr. cost recovery receivable
Compared to Other Methods
- similar to installment method in that it may only be used when receivables are collected over an extended period and there is no reasonable basis for estimating their collectibility
- most conservative method of revenue recognition
Exchanges Having Commercial Substance
Accounting for Nonmonetary Exchanges
has commercial substance if future cash flow changes as a result of the transaction
- any change in cash flows
- change can either be in area of risk, timing, or amount of cash flows
- gain/loss recognized based on fair value of asset given up minus carrying value of the asset given up* (not FV or asset received)
- basis is FMV + whatever paid
GAAP vs IFRS
- for IFRS, nonmonetary exchanges are separated into similar and dissimilar exchanges
- dissimilar have gains calculated like GAAP w commercial substance
- for similar, no gain recognized
Exchanges Lacking Commercial Substance
Accounting for Nonmonetary Exchanges
no commercial substance if:
- no change in cash flows or
- fair value can not be determined
- then basis of asset received is based on carrying value of asset exchanged + gain (?)
Gains
- no boot received = no gain
- if boot is paid = no gain
- if boot is received < 25% of consideration received = recognize proportional gain
- if boot received (or paid for other party*) > 25% = recognize entire gain
Losses
- always recognize
Involuntary Conversions
Accounting for Nonmonetary Exchanges
whenever a nonmonetary asset is involuntarily converted, gain/loss is recognized for financial acct purposes
-gain/loss recognized
Historic Cost
Current Cost
Nominal Dollars
Constant Dollars
HC: actual exchange in value at the time
CC: cost that would be incurred at the present time, the replacement cost or recoverable amt if lower*(Appreciation)
ND: unadjusted for changes in purchasing power
CD: dollars restated based on CPI ratios (Inflation)
HCND: basis for GAAP
HCCD: adjusts for Inflation (adj w general price index)
CCND: adjusts for Appreciation (adj w specific price index)
CCCD: adjusts for Inflation and Appreciation
Monetary vs Nonmonetary
Monetary assets and liabilities are fixed
- holding monetary assets in inflation will decrease purchasing power
- holding monetary liabilities in inflation will increase purchasing power
Nonmonetary assets and liabilities fluctuate
- inflation and deflation
- fair market value
know monetary/non assets and their contras F2-43***
Foreign Currency Accounting
2 types
- Foreign Currency Transaction: foreign currency transactions w a foreign entity denominated in foreign currency
- Foreign Currency Translation: conversion of financial statements of a foreign entity into FSs expressed in domestic currency
Currency Exchange Rate
Foreign Currency Accounting
exchange rate at the current date for immediate delivery of currency
- aka spot rate
- year end
Forward Exchange Rate
Foreign Currency Accounting
exchange rate existing now for exchanging two currencies at a specific future date
- bet
Historical Exchange Rate
Foreign Currency Accounting
rate in effect at the date of issuance of stock or acquisition of an asset
- used for equity
- could also be used for other assets
Weighted Average Weight
Foreign Currency Accounting
used for income statement
- takes into account exchange rate fluctuations for the period
Reporting Currency
Foreign Currency Accounting
currency of the entity ultimately reporting financial results of the foreign entity
- us dollar
Functional Currency*
Foreign Currency Accounting
the currency of the primary economic environment in which the entity operates, usually the local currency or the reporting currency
Foreign Currency Translation
Foreign Currency Accounting
restatement of financials denominated in a functional currency to the reporting currency using appropriate rates of exchange
- functional
Foreign Currency Remeasurement
Foreign Currency Accounting
the restatement of foreign financial statements from the foreign currency to the entity’s functional currency in the following situations:
- reporting currency is the functional currency
- FSs must be restated in the entity’s functional currency prior to translating the FSs from the functional currency to the reporting currency
- Dysfunctional
Foreign Financial Statement Translation
before a parent company can consolidate the FSs of a foreign subsidiary, the subsidiary’s foreign FSs must be restated in the parent’s company reporting currency.
- the method used to restate the foreign subsidiary’s FSs is determined by the functional currency of the foreign subsidiary
Steps in Restating Foreign FSs
Foreign Financial Statement Translation
- Prepare in accordance w GAAP
- Determine the Functional Currency
- foreign operations are relatively self contained and integrated w/i the country
- day to day operations do not depend on the parent’s or investor’s functional currency
- the local economy of the foreign entity is not highly inflationary, defined as cumulative inflation of 100% over 3 years - Determine Appropriate Exchange Rates
- Remeasure and/or Translate the FSs*
Remeasurement Method (aka temporal method)
Steps in Restating Foreign FSs
- dysfunctional
Balance Sheet first
- monetary = Current/Year end Rate
- nonmonetary (at cost) = Historical rate
- inventory at weighted average if purchased evenly throughout the year
Income Statement
- non-BS accounts = Weighted Average
- BS accounts = Historical rate
Remeasurement Gain or Loss
- income statement
- plug Currency Gain/Loss to get NI to required amount needed to adjust RE in order to make the BS balance
- goes to income from continuing operations
GAAP vs IFRS
- F2-49
Translation Method
Steps in Restating Foreign FSs
- functional/normal
- current rate method
Income Statement
- all IS items = Weighted Average
- transfer NI to RE
Balance Sheet
- Assets and Liabilities = Current/YE spot rate
- Common Stock/APIC = Historical rate
- Retained Earnings = Roll Forward
- translated RE is beginning translated RE + NI for current period less translated dividends declared for the current period
Translation Gain or Loss
- goes to OCI (PUFER)
- translation adjustment is diff b/w debits and credits in translated trial balance
- cumulative translation adjustment (CTA)
Individual Foreign Transaction
Types of Foreign Currency Transactions
- operating transactions and
- forward exchange contracts
Changes in Exchange Rate
- a foreign exchange transaction gain or loss will result if the exchange rate changes b/w time a purchase or sale is contracted and the time the actual payment is made
Transactions Not Settled at the BS Date
- mark to market (goes into income from cont. ops)
- use spot rate
- unsure..? F2-52
- year end difference?
- hits IS
Valuation of Assets and Liabilities
- historical rate
- asset or liability resulting from foreign currency transactions should be recorded in the US company’s books using the exchange rate in effect at date of transaction
good example F2-52
Other Comprehensive Bases of Accounting (OCBOA)
non-GAAP presentations that have wide-spread understanding and support. include:
- cash basis and modified cash basis of acct
- tax basis of acct
- a definite set of criteria have substantial support
- a regulatory basis of acct
General OCBOA Presentation Guidelines
Other Comprehensive Bases of Accounting
following guidelines apply to all OCBOA FSs presentations:
- FS titles should differentiate the OCBOA FSs from accrual basis FSs
- FS should explain any change in equity accounts
- statement of cash flow not required
- disclosures similar to GAAP should including SSAP and disclosures
Cash Basis Financial Statements
Other Comprehensive Bases of Accounting
- revs recognized when cash received, exps recognized when cash paid
- generally used by estates, trusts, civic ventures, and political campaigns and committees
Presentation
- cash basis FSs include a statement of cash and equity and a statement of cash receipts and disbursements
1. Statement of Cash and Equity - in pure cash basis FS, cash is the only asset, no liabilities, equity is equal to cash
2. Statement of Cash Receipts and Disbursements - revenues received
- expenses paid
- proceeds from asset sales
- payments for purchases of assets
- debt repayments
- dividend payments
- debt and equity proceeds
Modified Cash Basis Financial Statements
Other Comprehensive Bases of Accounting
Common Modifications to cash basis w substantial support:
- capitalizing and depreciating fixed assets
- capitalizing inventory
- accrual of income taxes
- recording liabilities for long-term and short- term borrowings and the related interest expense
- reporting investments at FV and recognizing unrealized gains and losses
Presentation~
- include statement of assets and liabilities
- statement of revenue collected and expenses paid
~F2-55
Income Tax Basis Financial Statements
Other Comprehensive Bases of Accounting
well suited for complex corps, unlike cash basis
Accounting Issues
- tax basis FSs are prepared based on the methods used to prepare tax return
- special acct treatment must be given to nontaxable revenue and expenses not reported on tax return
Nontaxable Revenues and Expenses
- may be reported as:
- separate line items in the rev and exp sections of the statement of revenues and expenses
- additions or deductions to net income or
- a disclosure in a note
*- for estimating income taxes for personal financial statements, use difference between fair value and tax basis of assets and liabilities
Presentation
~F2-55
Statement of Financial Condition
Personal Financial Statements
= Balance Sheet
assets reported at estimated current FV
- life insurance loans payable are netted against the cash surrender value of life insurance
- a business interest that constitutes a large part of an individual’s total assets should be presented as a single amount at estimated current value separately from other investments
- vested pension plan benefits are reported at fair value
liabilities reported at estimated current amount
- generally same as GAAP, but sometimes present value is lower than cost so it would be at the lower PV
- deferred tax liability reported for estimated taxes due
net worth at fair value is diff b/w assets and liabilities
the presentation of assets and liabilities is made in order of liquidity and maturity, with no current and noncurrent classifications
cash basis net income to accrual basis net income cheat
add increases in current assets
subtract decreases in current assets
add decreases in current liabilities
subtract increases in current liabilities
% of Completion vs Completed Contract
SIM
% of completion:
- dr: construction expense (for current period costs), dr: construction in progress (for amt of gain recognized), cr: revenue
completed contract:
- no JE
% of completion:
- asset/liability (diff b/w CIP and billings) is noncurrent until year before completion then current
completed contract:
- always current
