F2- Matching (R&E), Foreign Currency Accounting, Other FS Pres.

Question 1

What are the four criteria that must be met for each element of a contract before any revenue can be recognized? (when it is realized or realizeable and earned)

Answer 1

1) Persuasive evidence of an arrangement exists (Signed Contract)
2) Delivery has occurred or services rendered (Transfer of risk & rewards)
3) The price is fixed and determinable (no price contingencies)
4) Collection is reasonably assured (Standard Collection Terms)

Question 2

When is revenue from the sale of products or the disposal of assets recognized?

Answer 2

On the date of sale (delivery date)

Question 3

In general, what conditions must exist for a sale to have taken place?

Answer 3

1) Delivery of goods or setting aside of goods ordered

2) Transfer of legal title

Question 4

How is revenue that stems from allowing the use of an entity’s products recognized?

Answer 4

Over time, as the assets are used

Question 5

According to IFRS, what are the four categories of revenue transactions?

Answer 5

1) Sale of Goods
2) Rendering of Services
3) Revenue from Interest, Royalties, & Dividends
4) Construction Contracts

Question 6

According to IFRS, what conditions must be met before revenue from the sale of goods can be recognized?

Answer 6

1) The revenue and costs incurred for the transaction can be MEASURED RELIABLY.
2) It is probably that ECONOMIC BENEFITS from the transaction will flow to the entity.
3) The entity has transferred to the buyer the significant RISK and REWARDS of ownership.
4) The entity does NOT retain MANAGERIAL INVOLVEMENT to the degree associated with ownership or control of the goods sold.

Question 7

Under IFRS, what method is used to recognize revenue from the rendering of services? And what conditions must be met for the outcome of a transaction to be estimated reliably?

Answer 7

Percentage of Completion Method

1) R&C can be MEASURED RELIABLY
2) ECONOMIC BENEFITS will flow to entity
3) The STAGE OF COMPLETION of the transaction can be measured reliably.

Question 8

Under IFRS, when is revenue from Interest, Royalties, and Dividends recognized?

Answer 8

1) Revenue can be measured reliably
2) Economic benefits will flow to entity

Interest revenue is recognized using effective interest method, royalties on accrual basis, and dividends when shareholders’ rights to receive payment are established.

Question 9

According to IFRS, how should construction revenue be recognized and what conditions must be met?

Answer 9

Revenue is recognized according to the percentage of completion method when the outcome of the construction contract can be estimated reliably.

Conditions are:

1) Contract R&C of transaction can be measured reliably.
2) Economic benefits will flow
3) Both the contract costs to complete the contract and the Stage of contract completion at end of reporting period can be measured reliably.

Question 10

What is unearned revenue or deferred revenue?

Answer 10

Cash that is received before it is earned. These represent liabilities because the entity must earn it or return it.

Question 11

What is the difference between realization and recognition?

Answer 11

Realization occurs when the entity obtains cash or the right to receive cash or has converted a noncash resource to cash…Basically a REAL WORLD event.

Recognition is the actual RECORDING of transactions and events in the financial statements.

Question 12

What effect do deferred revenues and expenses have on the income statement and balance sheets?

Answer 12

No CURRENT income statement impact. They will be on the balance sheet and have an impact on cash. As they are earned, they move to income statement and off balance sheet.

Question 13

Prepaid expenses are treated similar to deferred revenue and expenses?

Answer 13

Yes, prepaid expenses are an asset that will be moved to income statement over time.

Question 14

In order to recognize revenue that arises from a sale transaction where the buyer has the Right to Return product, what conditions must be met?

Answer 14

1) The sales price is substantially fixed at date of sale.
2) Buyer assumes all risks of loss bc goods are in buyer’s possession.
3) Buyer has paid some form of consideration.
4) The product sold is substantially complete
5) Amount of future returns can be reasonably estimated.

All these basically mean this is NOT a contingent sale. If any of these conditions are not met, the revenue recognition shall be deferred.

Question 15

What are the two types of fees in franchise accounting? Know how to do these from perspective of Franshisor and Franchisee

Answer 15

1) Initial Franchise Fees-From franchisee POV this is a intangible asset and must be amorized over the life of the franchise
2) Continuing Franchise Fees-Reported by franchisee as an expense and as revenue by franshisor in period incurred.

Question 16

What are the most common intangible assets tested on the CPA exam?

Answer 16

Patents, copyrights, franchises, trademarks, and goodwill.

Question 17

What are the exceptions to costs associated with intangible assets not being able to be capitalized?

Answer 17

Intangibles that are specifically identifiable, such as:

1) Legal fees and other costs related to SUCCESSFUL Defense of the asset. Unsuccessful is expensed and then tested for impairment.
2) Registration or Consulting fees
3) Design costs (ex:trademark)
4) Other direct costs to secure the asset.

Question 18

IFRS allows the capitalization of development costs under what conditions?

Answer 18

1) Technological feasibility has been established
2) Entity intends to complete the intangible asset
3) Entity has the ability to use or sell the IA
4) IA will generate future economic benefits
5) Adequate resources are available to complete development

Question 19

What 4 types of changes can have an impact on the amortization of a intangible asset?

Answer 19

1) It becomes worthless-writeoff the entire remaining cost to expense.
2) Impairment- Write down the intangible asset (expense the impairment) and recognize impairment loss
3) Change in Useful Life- Recalculate Amortization
4) Sale- Compare the carrying value at date of sale with the selling price to determine gain or loss.

Question 20

According to US GAAP, how are intangible assets valued?

Answer 20

Finite life assets are Reported at cost-amortization and impairment.

Indefinite life IA’s are reported at cost-impairment

Question 21

What two ways can IA’s be reported under IFRS?

Answer 21

1) Cost Model=US GAAP, cost-AM & IM
2) Revaluation Model= Fair Value
Initially recognized at cost and then revalued to fair value at subsequent revaluation date.
-Carrying Value= FV on reval date-Subsequent Amortization-subsequent impairment

Question 22

Know the rules for revaluation losses and gains

Answer 22

Revaluation Losses go to income statement unless reversing a previously recognized gain. One that is reversing previous gain goes to OCI and reduces the revaluation surplus in Accumulated OCI

Revaluation gains go to OCI and accumulated in equity as revaluation surplus unless the gain reverses previously recognized loss. If loss has been reported on income statement gain goes there to the extent that it reverses the loss.

Impairment of a revalued asset must first reduce any revaluation surplus in equity with any additional losses reported on the income statement.

Question 23

What are the two methods for calculating goodwill?

Answer 23

1) Acquisition Method- Goodwill is the excess of an acquired entity’s fair value over the fair value of the entity’s net assets, including identifiable intangible assets.
2) Equity Method- Involves purchase of a company’s capital stock. GW is the excess of the stock purchase price over the fair value of net assets acquired.

Question 24

Under US GAAP, what are the only types of research and development costs that are not expensed?

Answer 24

1) Materials, equipment, or facilities that have alternate future uses. =Cap and depreciate over useful lives.
2) R&D costs of any nature undertaken on behalf of others under a contractual agreement. For provider of these services these costs will be considered cost of sales.

Question 25

What is the process of accounting for Computer Software Development Costs according to GAAP?

Answer 25

Expense costs incurred until technological feasibility has been established for the product.

Capitalize costs incurred AFTER technological feasibility has been established up to the point that the product is released for sale.

Question 26

Does IFRS have any separate guidance pertaining to computer software development?

Answer 26

No, they are considered internally generated intangibles and research costs must be expensed and development costs capitalized if criteria met.

Question 27

What is the process for Amortizing Capitalized Software Costs?

Answer 27

Annual Amortization (on product by product basis) is the Great of the Percentage of Revenue or Straight Line Methods.

POR= Total Capped Amt * (Current gross revenue for period / Total projected gross revenue for the product)

Straight Line = Total Capped / Estimated economic life

Question 28

How should capped software developed for internal use only be amortized? And what will happen if ends up being sold to outside user?

Answer 28

Straight Line Method only since no sales.

Proceeds received applied to carrying amount of software then after carrying amount reaches zero, anything above should be recognized as revenue.

Question 29

How often should assets be tested for impairment?

Answer 29

Annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Question 30

What is the two step impairment test for Intangible assets with finite life?

Answer 30

1) Carrying amount of the asset is compared to sum of Undiscounted Cash Flows expected to result from the use of the asset and its eventual disposition. (are undiscounted flows > carrying value, if yes, no impair, if no, step 2 needed)
2) Asset is impaired and the impairment loss equal to the difference between the carrying amount of the asset and its FAIR VALUE is recorded. (Find amount of impairment)

Question 31

What is the impairment test for intangible assets with infinite lives?

Answer 31

Simply Compare the Carrying Value to the Fair Value to determine impairment.

Question 32

What is the IFRS Impairment Model?

Answer 32

One step of comparing CV to FV

Question 33

According to US GAAP, at what level is Goodwill Impairment determined?

Answer 33

Goodwill Impairment is calculated at a reporting unit level. Impairment exists when the carrying amount of the reporting unit goodwill exceeds its fair value.

Question 34

According to IFRS, what level is Goodwill impairment determined?

Answer 34

The Cash Generating Unit Level. A cash Generating unit is defined as teh smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

Question 35

When is it acceptable to use the Completed Contract method for Long-Term Construction contracts?

Answer 35

1) It is difficult to estimate the costs of a contract in progress
2) There are many contracts in progress so that about an equal number are completed in each year and an unequal recognition of income does not result.
3) The projects are of short duration, and collections are not assured.

Question 36

Where should excess accumulated costs in excess of billings be reflected? Where should the excess of billings that exceed the related costs be reflected?

Answer 36

Cost>Billings= Current Asset…often named Construction in Progress

Billings>Cost=Current Liability…example would be a retainer fee or deposit or excess billing.

Question 37

How to account for the Completed Contract Method?

Answer 37

1) Overhead and Direct costs should be charged to a construction in progress account.
2) Billings/Cash received should be credited to advances on construction in progress account
3) At completion, Gross Profit or Loss is recognized as Contract Price-Total costs= GP

Question 38

When should losses be recognized under completed contract method?

Answer 38

Losses are recognized in full in the year they are discovered.

Question 39

Does IFRS allow the completed contract method for long-term construction contracts?

Answer 39

No, The percentage of completion method must be used unless final outcome of project cannot be estimated, then cost recover method should be used. Meaning revenue can only be recognized to the extent that cash collected exceeds costs incurred.

Question 40

Under GAAP and IFRS, when does the percentage of completion method recognize income?

Answer 40

As work progresses on the contract.

Question 41

What are the 4 steps for determining Gross Profit or loss according to the Percentage of Completion Method?

Answer 41

1) Compute gross profit of completed contract:
=Contract Price - Estimated Total Cost

2) Compute % of Completion:
=Total cost to date / total estimated cost of contract

3) Compute gross profit earned= Step 1 * Step 2

4) Compute Gross profit earned for current year=
Profit to date(from step 3) at current year end - PTD at beginning of year

Question 42

When is the installment method of accounting used?

Answer 42

When there is no reasonable basis for estimating the degree of collectiblity. Revenue is recognized when cash is actually collected.

Question 43

How do you calculate Earned Gross Profit and Deferred Gross Profit?

Answer 43

Earned GP= Cash Collections * GP %

Deferred GP= Receivable * GP %

Question 44

What are the Rules for Gains arising from exchanges lacking commercial substance?

Answer 44

1) No Boot is received= No Gain
2) Boot is Paid = No Gain
3) Boot is Received= Recognize Gain

• Recognize all of the Gain if Boot received exceeds 25% of the total consideration (including boot) received. The transaction is then viewed as a monetary exchange.
• Recognize Proportional Gain when boot received is less than 25%. Take ratio of total boot received/total consideration received and multiply that by the total gain.

Question 45

What determines rather or not a exchange lacks commercial substanc?

Answer 45

If there was no change in value of cash flows, or if fair value cannot be determined.

Question 46

What is the difference between Nominal Dollars and Constant Dollars?

Answer 46

Nominal Dollars= Unadjusted for changes in purchasing power

Constant Dollars= Dollars restated based on calculations of CPI ratios

Question 47

What are the four methods of measuring prices and the effects of price changes (what adjustments would need to be made)?

Answer 47

Historical Cost/Nominal Dollars (HCND)= Basis for GAAP because it is historical prices with no restatement for purchasing power of dollar. No adjusting Needed.

Historical Cost/Constant Dollars (HCCD)= Needs to be adjusted for inflation.

Current Cost/Nominal Dollars (CCND)= Needs to be adjusted for appreciation

Current Cost/Constant Dollars (CCCD)= Adjustments for both appreciation and inflation.

Question 48

What is the difference between Monetary and Non-Monetary Items

Answer 48

Monetary assets and liabilities are fixed or denominated in dollars regardless of changes in specific prices or the general price level.

Non-Monetary Items are A&Ls that fluctuate in value with inflation and deflation.

Question 49

What is the direct method for expressing exchange rates? The Indirect method?

Answer 49

Direct method is the domestic price of one unit of another currency. Ex: One euro costs $1.47

Indirect method is the foreign price of one unit of domestic currency. Ex: .68 Euros buys $1

Question 50

What are the Common Exchange Rates used in Translation of Financial statements and what statements are they most commonly used for?

Answer 50

Current Exchange Rate (Spot Rate)= Spot rate at a given time and used for most BALANCE SHEET accounts.

Historical Exchange Rate=
rate in effect at the date of issuance of stock or acquisition of assets. Used for EQUITY.

Weighted Average Rate= USED FOR INCOME STATEMENT.

Question 51

What is the Functional Currency?

Answer 51

The currency of the primary economic environment in which the entity operates, usually the local currency of the reporting unity.

Question 52

What to do when financial statements of foreign subsidiary are not in functional currency?

Answer 52

We use the remeasurement method. This gets the currency from “dysfunctional” to funcitional. Financial statements are remeasured to the functional currency starting with the balance sheet.

Balance Sheet Rates to be Used:

1) Monetary Items= Current/year end rate
2) Non-Monetary Items=Historical rate (at time of purchase)

Income Statement Rates:

1) Non balance sheet related items= weighted average rate
2) balance sheet related = historical
- depreciation, cogs/inventory, amortizaion

In order to balance, after remeasurement, there will need to be a “Currency Gain/Loss” plug number to get net income to right number.

Question 53

If foreign financial statements are in functional currency, what method is to be used?

Answer 53

The translation method. Financial statements are translated to the reporting currency starting with the INCOME statement.

All income statement items are done at the WEIGHTED AVERAGE RATE and then transfer NI to RE.

Balance Sheet Items:

1) Assets=Spot
2) Liabilities= Spot
3) Common Stock/APIC= Historical Rate
4) RE= Roll forward

Question 54

Where does a translation Gain or Loss go?

Answer 54

In OCI. A plug of translation adjustment will go to OCI. It is calculated by taking the difference between the debits and credits in the translated trial balance.