F2 Matching, Foreign Currency Accounting, & Other F/S Presentations

Question 1

Where are translation adjustments reported in the financial statements?

Answer 1

OCI - treated as unrealized gains and losses.

Question 2

Where are re-measurement gains/losses reported in the financial statement?

Answer 2

Re-measurement gains and losses are recognized on the income statement.

Question 3

How are gains/losses on nonmonetary exchanges recognized under US GAAP?

Answer 3

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.

Question 4

State the formula for calculating the gross profit realized on installment sales.

Answer 4

Cash received * (total gross profit/sales price)

Question 5

What is the maximum period over which an identifiable intangible asset (not goodwill) should be amortized

Answer 5

• 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.

Question 6

List some items not considered research and development costs.

Answer 6

• routine periodic design changes
• marketing research
• quality control testing
• reformation of a chemical compound

Question 7

For operating transactions in foreign currency, detail the recording process.

Answer 7

• 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.

Question 8

In a nonmonetary exchange, what is the basis of the new asset under US GAAP?

Answer 8

• 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)

Question 9

When are profits recognized under the cost recovery method?

Answer 9

Only after all costs have been recovered.

Question 10

ID two methods of revenue recognition for long-term construction-type contracts under US GAAP & IFRS

Answer 10

US GAAP:

• percentage of completion
• completed contract

IFRS:

• Percentage of completion
• cost recovery

Question 11

When will an asset exchange have commercial substance under US GAAP?

Answer 11

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.

Question 12

Under US GAAP, a private company may elect to apply the alternative method of goodwill accounting. Describe the steps of this method.

Answer 12

• 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

Question 13

Define start-up costs. What is the accounting treatment of start-up costs?

Answer 13

• 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

Question 14

What are nonmonetary items?

Answer 14

• 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

Question 15

Where are translation adjustments reported in the financial statements?

Answer 15

Translation gains or losses are reported in other comprehensive income. They are treated as unrealized gains and losses.

Question 16

In general, what are the criteria for revenue recognition under US GAAP?

Answer 16

Earned and realized or realizable; four criteria must be met before revenue can be recognized

1. persuasive evidence of an arrangement exists
2. Delivery has occurred or services has been rendered
3. The price is fixed and determinable
4. collection is reasonably assured

Question 17

Identify the exchange rate to be used when translating different components of the balance sheets and income statements

Answer 17

Assets & liabilities - current exchange rate
Common stock & APIC - historical rate
Revenue & expenses - weighted average exchange rate for the period

Question 18

What are the conditions for revenue recognition when the right of return exists?

Answer 18

• 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

Question 19

Define goodwill

Answer 19

Excess FV of sub over FV of tangible assets

Costs to maintain &/or develop goodwill cannot be capitalized

Question 20

How is impairment of long-lived assets other than goodwill analyzed under IFRS?

Answer 20

• 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)

Question 21

How are intangible assets reported under US GAAP and IFRS?

Answer 21

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

Question 22

How are gains/losses on nonmonetary exchanges recognized under IFRS?

Answer 22

• exchange of similar assets: no gain recognized, losses recognized in full
• exchange of dissimilar assets: all gains and losses recognized

Question 23

Name example of:
1- accelerated
2- deferred revenue recognition
Relative to normal recognition when revenue is recognized at the time goods are transferred

Answer 23

• percentage of completion method of long-term construction accounting (accelerated method)
• the installment method, deferred revenue recogniton

Question 24

State the formula for recognizing the G/L on long-term construction type contracts under percentage of completion method

Answer 24

(total cost to date / total estimated cost of contract) * total estimated gross profit - gross profit recognized to date

Question 25

Identify the exchange rate to be used when remeasuring different components of the balance sheet and income statement.

Answer 25

Balance sheet:

• monetary, current exchange rate
• nonmonetary historical rate

Income statement

• balance sheet related, historical rate
• non-balance sheet related, weighted average

Question 26

When is the translation method used?

Answer 26

Translation is used to restate financial statements denominated in the functional currency to the reporting unit.

Question 27

What are monetary items?

Answer 27

• 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.

Question 28

How should the costs of capitalized computer software developed for resale be amortized under US GAAP?

Answer 28

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

Question 29

When should revenue from the performance of services be recognized under US GAAP & IFRS

Answer 29

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

Question 30

What is the test of recoverability for the impairment of long-lived assets other than goodwill under US GAAP?

Answer 30

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

Question 31

State two types of foreign currency transactions

Answer 31

• 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

Question 32

What is the proper treatment of research & development costs under US GAAP & IFRS?

Answer 32

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

Question 33

How is goodwill impairment analyzed under IFRS?

Answer 33

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

Question 34

What are the general guidelines for OCBOA financial statements presentation?

Answer 34

• 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

Question 35

Outline the treatment of computer software developed internally or obtained for internal use only under US GAAP

Answer 35

• 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

Question 36

When is the remeasurement method used?

Answer 36

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

Question 37

ID two foreign currency activities

Answer 37

• FC Translations

- FC Transactions

Question 38

When should the costs of developing computer software for resale, lease, or licensing be capitalized under US GAAP?

Answer 38

After technological feasibility has been established and before the product is released for sale.

Question 39

How are purchased intangible assets and internally developed intangible assets recorded under US GAAP & IFRS?

Answer 39

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

Question 40

For long-term construction-type contracts, when are losses recognized?

Answer 40

Immediately when discovered, regardless of the method used for revenue recognition

Question 41

What are the four categories of revenue transactions under IFRS and what are the common revenue recognition criteria for those categories?

Answer 41

1. Sales of goods
2. Rendering of services
3. Revenue from interest, royalties & dividends
4. 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

Question 42

What is the calculation for impairment loss under US GAAP and IFRS?

Answer 42

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

Question 43

How should the contractual amounts of future services to be performed under a franchise agreement be accounted for by 1) the franchisor & 2) franchisee

Answer 43

They should be recorded at their PV as unearned revenue by the franchisor until earned and as an intangible asset by the franchisee.

Question 44

What is an entity’s functional currency under US GAAP?

Answer 44

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

Question 45

Where are foreign currency transaction gains or losses reported in the F/S?

Answer 45

Included in determining net income for the period.