F2 - Matching Principle & Foreign Currency accounting

Question 1

Revenue recognition for sales of goods (IFRS)

Answer 1

1. Revenue and cost incurred for the transaction can be measured reliably.
2. Economic benefit from the transaction will flow to the entity.
3. Risk and rewards of ownership will transfer to the buyer.
4. The entity don’t retain any managerial involvement.

Question 2

Revenue recognition for rendering services (IFRS)

Answer 2

1. Revenue and cost incurred for the transaction can be measured reliably.
2. Economic benefit from the transaction will flow to the entity.
3. Stage of completion of the transaction can be measured reliably.

Question 3

Difference between Realization and Recognition

Answer 3

Realization is what happens in real world; when the entity obtain cash or the right to receive cash.

Recognition is the actual recording of the transaction.

Question 4

Brief on Accrual accounting.

Answer 4

It records the transaction and events as they occur, not when cash is received or expended.

Question 5

Revenue of recognition when the right of return exist

Answer 5

1. Sales price is substantially fixed.
2. The buyer assumes all risk of loss.
3. The buyer paid some of the consideration.
4. The product sold is substantially completed.
5. The amount of future returns can be reasonably estimated.

Question 6

When initial franchise fees are earned

Answer 6

Earned when substantial performance on future services has occurred.

Question 7

What does substantial performance means;

Answer 7

1. The franchisor has no obligation to refund any payment.
2. Initial services required by franchisor has been performed (site selection, supervision of construction, quality control)
3. All other sales conditions have been met; are considered met on first day of operations to the franchisee.

Question 8

Intangible assets classification;

Answer 8

1. Identifiable such as patent, copy rights, franchise.

2. Unidentifiable such as good will.

Question 9

Intangible assets accounting treatment

Answer 9

They are recorded at cost (Capitalized) along with legal fees or successful law suit and registration fees.

Other costs are expensed immediately.

Question 10

R and D under GAAP and IFRS

Answer 10

IFRS; research is expensed while development Is capitalized.

GAAP; both are expensed immediately.

Question 11

Amortization and Impairment for Intangible assets.

Answer 11

Identifiable assets should be amortized and impaired.

unidentifiable assets should be impaired only.

Question 12

Intangible assets impairment under IFRS

Answer 12

1. Cost Model; the asset should be recorded at cost and adjusted for amortization and impairment.
2. Revaluation Model; asset should be recorded at cost first the revaluated at fair value subsequent revaluation date and adjusted for amortization and impairment.

Question 13

Impairment Loss calculation under IFRS

Answer 13

Should subtract carrying value by the GREATER of ;

1. NRV ( FV - Cost to Sell)
2. Value in use.

Question 14

Revaluation accounting treatment for intangible assets under IFRS

Answer 14

1. Revaluation Loss; Goes to I/S except if it reverse subsequent revaluation gain it goes to OCI to reduce revaluation surplus.
2. Revaluation Gain; Goes to OCI except if it reverse subsequent revaluation loss it goes to I/S to reduce previous revaluation loss.

Question 15

Patent amortization life

Answer 15

The SHORTER of its estimated life or remaining legal life.

Question 16

R and D costs are expensed except if;

Answer 16

1. Materials, equipment, facilities have alternative future uses (can be used on more than 1 project); depreciation should be expensed.
2. Costs of any undertaken on behalf of others (the buyer should consider it as expense while the seller should capitalize it).

Question 17

Accounting treatment for computer software development cost.

Answer 17

1. Before technological feasibility should be expensed

2. After technological feasibility should be capitalized

Question 18

For Impairment loss for Intangible assets treatment under GAAP

Answer 18

Impairment loss it goes to I/S under continuing operations unless the impairment is related to discontinued operations.

please check book P.22

Question 19

When revenue is recognized under completed contract method

Answer 19

Only on completion of the contract

Question 20

Requirements to use completed contract method

Answer 20

1. It is difficult to estimate the cost of a contract in progress.
2. The projects are short term duration.

Question 21

Balance sheet presentation for completed contract method

Answer 21

If cost (work performed) > billings to customer then it is assets, If cost (work performed)

Question 22

Accounting treatment for percentage of completion method

Answer 22

P. 133 or P.13 in F2

Question 23

Disclosure requirements for long term constructions

Answer 23

No special disclosure is required because it is the nature of contractor’s business.

Question 24

Difference between percentage of completion and installment sales

Answer 24

Percentage of completion represents accrual method while installment sales represents cash basis.

Question 25

Installment sales computations;

Answer 25

1. Earned gross profit = collections * GP %
2. Deferred GP = Ending AR * GP%
3. Collections = GP / GP% or Sales - Ending AR

Question 26

Percentage of completion computations;

Answer 26

1. GP = Contract price - Estimated TC
2. % of completion = YTD cost / Estimated TC
3. GP earned = 1 * 2

Loss is recognized in full in the year it is discovered.

Question 27

Brief on Cost Recovery Method

Answer 27

No profit is recognized on a sale until all costs have been recovered; at time of sale all expected profit on sale is recorded as deferred gross profit.

Collections are first applied to the recovery of product cost, collections after all costs have been recovered are recognized as profit.

It is similar to installment sales except that receivables are collected over an extended period & there is no reasonable basis for estimating their collectability.

Question 28

Accounting for nonmonetary exchanges (GAAP)

Answer 28

1. Have commercial substance (FV approach used) - gain or loss recognized in full
2. Lack commercial substance - loss recognized, for gain specific rules.

Question 29

Gain or loss calculation if commercial substance exist

Answer 29

Gain/Loss = FV of asset given - CV of asset given

Question 30

Accounting for nonmonetary exchanges (IFRS)

Answer 30

1. Exchange of similar activities - cant recognize gain or loss
2. Exchange of dissimilar activities - recognize gain or loss.

Question 31

Gain recognition under exchange of nonmonetary transaction if Lacks Commercial Substance

Answer 31

1. No boot is received= no gain
2. Boot is paid = no gain
3. Boot is received = Recognize proportional gain (

Question 32

Foreign currency accounting

Answer 32

1. Foreign currency transaction; buy from and sell in a foreign currency.
2. Foreign currency translation; conversion of F/S of a foreign entity into F/S expressed in a domestic currency.

Question 33

How to determine functional currency

Answer 33

Where entity generates and expends cash.

Question 34

Foreign currency translation methods;

Answer 34

1. Remeasurement method; plug currency gain/loss from the difference between assets and liabilities in B/S to get net income.
2. Translation method; plug translation gain/loss “translation adjustment” to OCI under foreign translation adjustments.

Question 35

Currency rates used under Remeasurment method

Answer 35

B/S items:

1. Monetary items = current rate (spot rate)
2. Non-monetary items = historical rate

I/S items:

1. Non-balance sheet items = weighted AVG.
2. B/S items = historical rate; such as depreciation, cost of good sold, amortization.

Question 36

Currency rates used under Translation method

Answer 36

I/S items using weighted AVG

B/S items:

1. Asset = current ret
2. Liability = current rate
3. Common stock = historical rate

Question 37

Foreign F/S translation methods example

Answer 37

P.153 or P.51 F2