F2 Matching, Foreign Currency Accounting, & Other F/S Presentations Flashcards
Where are translation adjustments reported in the financial statements?
OCI - treated as unrealized gains and losses.
Where are re-measurement gains/losses reported in the financial statement?
Re-measurement gains and losses are recognized on the income statement.
How are gains/losses on nonmonetary exchanges recognized under US GAAP?
Exchange has commercial substance - always recognize gains and losses on the exchange to the difference between the FV of what is given up and the carrying value of what is given up.
Exchange does not have commercial substance or the assets fair value is not determinable (& the FV of the asset given up is unknown) - no gain on exchange is recognized unless boot is received & losses are recognized in full.
If boot received is greater than 25% of total consideration, all gains and losses are recognized by both parties to the exchange just as in a monetary transaction that has commercial substance.
State the formula for calculating the gross profit realized on installment sales.
Cash received * (total gross profit/sales price)
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 is tested at least annually for impairment.
List some items not considered research and development costs.
- routine periodic design changes
- marketing research
- quality control testing
- reformation of a chemical compound
For operating transactions in foreign currency, detail the recording process.
- record original transaction at exchange or spot rate on date of transaction
- at balance sheet date, compute gain/loss on the transaction by recalculating using the current exchange or spot rate.
- on payment date, compute gain/loss on the transaction by using the exchange rate on payment date.
In a nonmonetary exchange, what is the basis of the new asset under US GAAP?
- Has commercial substance (or when boot received exceeds 25% of total consideration), record at fair value of asset given up + cash paid (or - cash received) or the fair value of the asset received if it is more clearly evident.
- Lacks commercial substance, record at the net book value of the asset given up + cash paid (or - cash received) unless adjustments are needed for gain recognized (if boot is received)
When are profits recognized under the cost recovery method?
Only after all costs have been recovered.
ID two methods of revenue recognition for long-term construction-type contracts under US GAAP & IFRS
US GAAP:
- percentage of completion
- completed contract
IFRS:
- Percentage of completion
- cost recovery
When will an asset exchange have commercial substance under US GAAP?
When the entity expects a change in future cash flows as a result of the exchange and that expected change is material relative to the FV of the assets exchanged.
Under US GAAP, a private company may elect to apply the alternative method of goodwill accounting. Describe the steps of this method.
- amortize goodwill on a straight line basis over 10 years or less than 10 years if the entity can demonstrate that another useful life is more appropriate
- make accounting policy election to test goodwill for impairment at either the entity level or reporting unit level when triggering event occurs.
- alternative method must be applied to all existing goodwill and any goodwill generated in future business combinations
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 include costs incurred in the formation of a corporation
- start up costs are expensed in the period incurred
What are nonmonetary items?
- assets and liabilities that fluctuate in value with inflation/deflation
- examples are inventories; property, plant & equipment & capital stock
These items need to be restated to constant dollars
Where are translation adjustments reported in the financial statements?
Translation gains or losses are reported in other comprehensive income. They are treated as unrealized gains and losses.
In general, what are the criteria for revenue recognition under US GAAP?
Earned and realized or realizable; four criteria must be met before revenue can be recognized
- persuasive evidence of an arrangement exists
- Delivery has occurred or services has been rendered
- The price is fixed and determinable
- collection is reasonably assured
Identify the exchange rate to be used when translating different components of the balance sheets and income statements
Assets & liabilities - current exchange rate
Common stock & APIC - historical rate
Revenue & expenses - weighted average exchange rate for the period
What are the conditions for revenue recognition when the right of return exists?
- sales price is substantially fixed at time of sale
- buyer assumes all risk of loss b/c goods are considered in the buyers possession
- buyer has paid some form of consideration
- product sold is substantially complete
- amount of future returns can be reasonably estimated
Define goodwill
Excess FV of sub over FV of tangible assets
Costs to maintain &/or develop goodwill cannot be capitalized
How is impairment of long-lived assets other than goodwill analyzed under IFRS?
- compare carrying value of the assets to the assets recoverable amount
- recoverable amount is the greater of assets FV less costs to sell and the assets value in use (PV of FCF)
How are intangible assets reported under US GAAP and IFRS?
US GAAP:
- Reported at cost less amortization (finite life intangibles only) & impairment
IFRS:
- reported using cost model or revaluation model. Revaluation model, intangibles are reported at FV on revaluation date less subsequent amortization & impairment
How are gains/losses on nonmonetary exchanges recognized under IFRS?
- exchange of similar assets: no gain recognized, losses recognized in full
- exchange of dissimilar assets: all gains and losses recognized
Name example of:
1- accelerated
2- deferred revenue recognition
Relative to normal recognition when revenue is recognized at the time goods are transferred
- percentage of completion method of long-term construction accounting (accelerated method)
- the installment method, deferred revenue recogniton
State the formula for recognizing the G/L on long-term construction type contracts under percentage of completion method
(total cost to date / total estimated cost of contract) * total estimated gross profit - gross profit recognized to date
Identify the exchange rate to be used when remeasuring different components of the balance sheet and income statement.
Balance sheet:
- monetary, current exchange rate
- nonmonetary historical rate
Income statement
- balance sheet related, historical rate
- non-balance sheet related, weighted average
When is the translation method used?
Translation is used to restate financial statements denominated in the functional currency to the reporting unit.
What are monetary items?
- assets and liabilities that are fixed in amount by contract or in terms of number of dollars
- examples include cash, accounts & notes receivable & accounts and notes payable
- these items are already stated in constant dollars.
How should the costs of capitalized computer software developed for resale be amortized under US GAAP?
Annual amort. is greater of:
Percent of revenue method = total capitalized amount * (current gross revenue for the period / total projected gross revenue for product)
OR - straight line
When should revenue from the performance of services be recognized under US GAAP & IFRS
US GAAP - in the period which the services have been rendered and are able to be billed
IFRS - using percentage of completion method when the outcome of the transaction can be estimated reliably
What is the test of recoverability 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
State two types of foreign currency transactions
- operating transactions, such as importing, exporting, borrowing, lending & investing transactions
- forward exchange contracts, which are agreements to exchange two different currencies at a specific future date and at a specific rate
What is the proper treatment of research & development costs under US GAAP & IFRS?
US GAAP: R&D costs should be expensed as incurred unless an expenditure for cap assets that have alternative future uses or for R&D undertaken on behalf of others under a contractual arrangement.
IFRS: Research costs must be expensed, development costs may be capitalized if they meet certain criteria
How is goodwill impairment analyzed under IFRS?
Goodwill impairment testing is done at the cash generating unit (CGU) level using one-step test.
Impairment losses are first allocated to goodwill and then allocated on a pro rata basis to the other CGU assets
What are the general guidelines for OCBOA financial statements presentation?
- different titles from accrual basis F/S
- required F/S are the equivalent of the accrual basis B/S and I/S
- F/S should explain changes in equity accounts
- no cash flow required
- Disclosures should be similar to GAAP financial statements disclosures
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 & maintenance
- capitalize costs incurred after prelim project state and for upgrades and enhancements
- capitalized costs should be amortized on a straight line basis
When is the remeasurement method used?
used to restate financial statements from the foreign currency to functional currency
- reporting currency is functional
- F/S must be restated in the functional currency prior to translating from functional to reporting
ID two foreign currency activities
- FC Translations
- FC Transactions
When should the costs of developing computer software for resale, lease, or licensing be capitalized under US GAAP?
After technological feasibility has been established and before the product is released for sale.
How are purchased intangible assets and internally developed intangible assets recorded under US GAAP & IFRS?
Purchased intangible assets - recorded at cost, including legal & registration fees, under US GAAP and IFRS
Internally developed intangible assets
- legal fees, costs and successful defense, registration fees, consulting fees & design fees are cap’d. under US GAAP & IFRS
- Under US GAAP, R&D costs must be expensed. Under IFRS, research costs must be expensed, but development costs may be capitalized if they meet certain criteria
For long-term construction-type contracts, when are losses recognized?
Immediately when discovered, regardless of the method used for revenue recognition
What are the four categories of revenue transactions under IFRS and what are the common revenue recognition criteria for those categories?
- Sales of goods
- Rendering of services
- Revenue from interest, royalties & dividends
- Construction contracts
Common revenue recognition criteria include
- revenues and costs can be reliably measured
- it is probably that economic benefits will flow to the entity
What is the calculation for impairment loss under US GAAP and IFRS?
US GAAP - amount by which carrying amount exceeds the FV of the asset
IFRS - amount by which the carrying amount exceeds the asset’s recoverable amount
How should the contractual amounts of future services to be performed under a franchise agreement be accounted for by 1) the franchisor & 2) franchisee
They should be recorded at their PV as unearned revenue by the franchisor until earned and as an intangible asset by the franchisee.
What is an entity’s functional currency under US GAAP?
Currency of the primary economic environment in which the entity operates. all conditions must be met:
- foreign operations are relatively self-contained and integrated w/in the country
- day to day operations do not depend on parent’s or investor’s functional currency
- local economy of the foreign entity is not highly inflationary
Where are foreign currency transaction gains or losses reported in the F/S?
Included in determining net income for the period.
