F2: Matching Revenues and Expenses.

Question 1

What is the criteria for revenue recognition under U.S GAAP?

Answer 1

First of all in order for revenue to be recognized it must be both earned, and realized or realizable

1. Delivery has occurred or services have been rendered.
2. Collection is reasonably assured.
3. Persuasive evidence that an arrangement exists.
4. The price is fixed or determinable

Question 2

What are the four revenue transactions under IFRS?

Answer 2

1. Sale of goods
2. Rendering of Services.
3. Revenue from interest, royalties and dividends.
4. Construction contracts.

Question 3

When is the recognition of services rendered recognized in U.S GAAP?

Answer 3

This is in the period that the services have been rendered and able to be billed.
IFRS- using % of completion method when the outcome can be estimated reliably.

Question 4

What is the max period over an intangible asset can be amortized?

Answer 4

Goodwill cannot be amortized but it is checked annually for impairment.
An intangible asset is amortized over the shorter of its useful life or remaining legal life (contract, copyright, franchise, patent).

Question 5

What items are not considered to be part of the research and development costs? There are four.

Answer 5

Routine periodic design changes.
Marketing research.
Quality control testing.
Reformulation of a chemical compound.

Question 6

What is the BAS method for accounting for the unearned revenues?

Answer 6

B is the balance of the prior period
A - is the additions to the unearned revenues, this is usually the receipt of cash.
S - subtract the revenue that is recognized over time.

Question 7

A revaluation loss that reverses or offsets a previously recognized gain under IFRS will have what type of accounting treatment.

Answer 7

First of a revaluation loss will be reported on the income statement as a loss.
If there was a previous gain this loss will be reported in OCI, and reduces the revaluation surplus in AOCI
A revaluation loss is where the Fair value is less then the carrying value.

Question 8

What is the accounting treatment for revaluation gains ?

Answer 8

First of all we know that revaluation gains and losses are reported on the OCI, and that is only part of IFRS.
A revaluation gain is when the Fair value on the revaluation date is greater than the carrying value.
A gain is usually on the OCI, but if it is backing out previously recognized losses, then it goes on the income statement.

Question 9

When is goodwill capitalized and when it is expensed?

Answer 9

Goodwill that is the excess of the fair value over the fair value of the company’s assets would be capitalized.
Internally generated Goodwill is going to be expensed since it is hard to determine objectivity that you had in determine its prices.

Question 10

What costs are associated with capitalizing and expensing goodwill?

Answer 10

Costs that are incurred with maintaining, developing, or restoring goodwill are not capitalized but they are expensed.
No costs are capitalized with goodwil, only when it is icnurred when acquiring the assets of another company.

Question 11

When there is an unlimited right of return what are the four conditions that must be present to recognize the sale.

Answer 11

The buyer has is completely responsible for all the losses.
The Price is substantially fixed.
The buyer has paid some form of consideration.
The amount of returns can be reasonably estimated.
All of these conditions must exist in order to recognize a sale.

Question 12

What is the two step process for determining the impairment for an intangible asset with a finite life?

Answer 12

First you compare the carrying value to the un-discounted cash flows, and if the carrying value is greater than their is a potential impairment.
Step 2 would be to compare the carrying value to the fair value of the asset to determine its actual impairment loss.

Question 13

When converting from the cash basis to the accrual basis what are some of the general rules for increases and decreases in payables?
What are the rules for increases/decrease in A/R?
What are the rules for increases in prepaid assets?
What are the rules for increases/decreases in unearned revenue?

Answer 13

When there is an increase in an asset there will be a increase in the net income.
When there is a deduction in a current asset this will be a decrease in the net income for accrual basis.
When there is a increase in a liability there will be a subtraction.
When there is a decrease in liability there will be an increase in the net income for accrual basis.
Assets have direct, and liabilities have indirect.
Prepaid expenses are assets, and accrued liabilities are liabilities.

Question 14

How do you calculate the impairment loss for a CGU? or good will impairment under IFRS?

Answer 14

To find the impairment loss you would have to compare the carrying value to the recoverable amount under the IFRS.
Then you would subtract the carrying value - the recoverable amount = the impairment loss.

Question 15

What is the recoverable amount under IFRS?

Answer 15

This is the greater of the fair value less costs to sell, or the value in use (the PV of the future cash flows)

Question 16

What are the five criteria that must be present if you are to capitalize development costs under IFRS?

Answer 16

1. You must have gone past the tech feasibility phase.
2. The company intends to complete the asset.
3. The completed asset is going to be sold or be used by the company.
4. The asset will generate future economic benefits.
5. There is sufficient resources available to complete the development of the asset for sale or use.

If any of these are not met than you cannot capital the development costs.

Question 17

When is it not okay to expense the R&D costs?

Answer 17

Materials, equipement, and facilities that have an alternate future use, are not expensed.
Research and development costs that are undertaken on behalf of others under a contract

Question 18

What are the requirements for using the completed contract method?

Answer 18

1. Difficult to estimate the costs of contract.
2. The projects are of short duration and collections are not assured.
3. There are many contracts in progress and there is equal number of them expiring in the current year and there is no unequal recognition of income.

Question 19

What two methods of accounting are apporiate under IFRS when it comes to long term construction contracts?

Answer 19

Cost recovery method and the percentage of completion method.

Question 20

How do you recognize a gross profit when it comes to completed contract method?

Answer 20

You cannot recognize revenue until it is earned.
You take the contract price - estimated costs - the actual costs incurred. If there is a profit then you cannot recognize it, but it this number is a negative then you will report the loss right away.

Question 21

What is the formula of the profit that is recognized for the percentage of completion method?

Answer 21

1. Cost of the contract
   - total estimated cost of contract (and cost to complete)
   = total gross profit.
2. Find percent of completion
   total cost to date / total estimated cost of contract.
3. Profit to date is percent of completion (#2) x total gross profit (#1).
4. then do PTD at year end - PTD at beginning of year.

Question 22

What are the two ways that U.S GAAP requires the nonmonetary assets to be categorized?

Answer 22

Those with commercial substance - if as a result of the transaction the future cash flows will change. Leads to a change in economic position.
Without commercial substance is when the future cash flows will not change and/or Fair value cannot be determined.

Question 23

What is the journal entry for a non monetary transaction?

Answer 23

DR New asset (FV of consideration)
DR Accumulated Dep of asst given up
DR cash received
DR loss if any
    CR old asset at historical cost
    CR cash given
    Cr gain if any

Question 24

Under IFRS how are losses and gains recognized on non monetary transactions?

Answer 24

They are categorized under similiar and dissimilar exchanges.
Similiar - you cannot recognize any gains, but you have to recgonize the losses in fulll.
Disimiliar - you have to recgonize the loss and gains.

Question 25

What are the rules for gains when there is no commerical substance?

Answer 25

• If no boot is received then there is no gain recognized.
• If the boot is paid then there is no commercial substance.
• If the boot is received is less than 25% of total consideration received a proportional amount of gain is recognized.
• If the boot that is received is greater than the 25% of the total consideration then it is considered a monetary exchange and both the gains and losses are recog normally. (you could also pay the boot, but if its greater than 25% both parties are going to recognize a gain or loss even if there i lack of commerical substance)

Question 26

Which of the costs include appreciation?

Answer 26

Historical cost does not inlcude it becuae this is teh price that you first got the asset for.
Current cost adjusts for the apprication.

Question 27

What adjusts and does not adjust for appreciation?

Answer 27

Nominal dollars are not ajdusted for changes in purchasing power.
Constant dollars are always restated.

Question 28

What is a monetary item? And when it is beenfitcal to own it?

Answer 28

This is where the price of something is fixed, either an asset or liablity, due to a contract or something else that will not let the price change.
If you have an asset during inflation you will lose purchasing power, but a liablity will inreae the purchasing power during an inflationary period.

Question 29

What are nonmonetary items?

Answer 29

The price of these assets or liabilities will fluctuate with inflation and deflation.

Question 30

What are the conditions that must exist for there to be a remeasuermnet in terms of a forieng currencey?

Answer 30

The parent company is integrated with the day to day operations of the sub.
There is a highly inflationary period going on, three years that are greater than 100%.
And the reporting currency is the functional currency.

Question 31

When using the re-measurement method for foreign currency translation what is measured at historical cost and what is measured at the current cost?

Answer 31

Current cost is the Monetary

Historical cost is non monetary like inventories that are carried at cost.

Question 32

What are some things that are included as research and development costs?

Answer 32

• Planning costs
• Design of Software
• Substantial testing during the projects initial phase.
• Testing in search for new products or alternatives.
• If R&D services are performed by company B for company A.
• If software is for internal use the R&D doesn’t apply
• Development and Improvement of techniques and processes.
• Prototype testing
• Salaries of engineering staff that developed new product. (but engineering follow up is not included)
• Depreciation on equipment that was used for R&D.
• Testing in search of a product or process alternatives.

Question 33

What are increases and decreases in accounts payable?

Answer 33

• An advance payment will be an increase.

- Checks written but not yet paid are an increase

Question 34

What do you expense or capitalize when it comes to internally used software?

Answer 34

You expense before the preliminary phase, which is the expenses of preliminary expenses, and that or training and maintenance during any stage must also be expensed

• You capitalize all the costs that occur after the preliminary phase.
• Market research is not R&D either.

Question 35

What is the matching principle?

Answer 35

It matches expenses with Revenues, not revenues with expenses.

Question 36

What does IFRS say about Goodwill that is internally generated?

Answer 36

That is is going to be expensed in the period that it is incurred.

Question 37

If you have an asset group and an goodwill, and you are testing for impairment which one do you check for first?

Answer 37

You will check for the impairment of the assets before you check the impairment of the goodwill.

Question 38

When do you have an asset or liability under the completed contract method?

Answer 38

You will have a asset if you have more costs and earnings than billings.
You will have a liability if you have more billings than cost and earnings.

Question 39

What another formula for the percentage of completion method?

Answer 39

total contract sales price 
- total estimated costs of the contract
= total gross profit
X percentage of completion
= gross profit earned to date
Gross profit from year end - gross profit year end = the income recognized in the current year.

Question 40

How do you get the completed contract method?

Answer 40

1. First find the gross profit = Sales - cost of sales
2. Find the gross profit % = Gross profit / Sales
3. Deferred gross profit = Gp % X AR

Question 41

If collection is in doubt what method do you use?

If the amount that is to be ultimately be collected cannot be determined what method do you use?

Answer 41

1. You would use the cost recovery method.

2. You would use the installment of sales method.

Question 42

How do you recognize profit under the cost recovery method?

Answer 42

You can only recognize the profit up to the amount that the cost is recovered. After you recover the cost then you can recognize subsequent profit.

Question 43

What are the criteria (3) for there to be a functional currency for one country?

Answer 43

1. The currency in which the entity keeps its books.
2. The currency in which the financial statements will be presented. (currency of parent).
3. A foreign currency other than one that the foreign entity maintains its books.
   Functional currency cannot be the local currency if its in a highly inflation environment)

Question 44

What values are reported on the personal financial statements (BV, FV)?
What are the two financial statements that are included?

Answer 44

They are reported at fair value, or in other words they can be reported at their current costs.
They would be the statement of net worth and statement of financial condition.