F2-Time Issue Flashcards
Research and Development Under GAAP and IFRS
Under GAAP-expensed
Under IFRS- research expensed but development may be capitalized if met criteria
Research and Development
Program design, planning, coding, testing
Before Technological Feasibility
Prototype testing, design modification
Improvement of techniques and processes
Amortization of capitalized software costs
Equals the greater of straight-line amortization or sales revenue from the software for the period ÷ total projected sale.
Successful legal defense costs related to patent
Should be capitalized and amortized over the lesser of the patent’s useful economic life or its legal life.
Patent will be capitalized and amortized over
The lesser of legal life or economic life
Internal development of goodwill
Cannot be capitalized, expensed
Goodwill-Amortized?
Not amortized, but it is subject to an impairment test.
R&D contracted out to a third party
Under U.S. GAAP reported as R&D expense.
Goodwill-Capitalized
Only when incurred in the purchase of another entity.
Costs incurred for maintaining or developing goodwill are expensed.
Trademark Amortization
Using buyer’s basis( usually the selling price), not seller’s carrying unamortized amount.
Software is for internal use
Not considered research and development
Under U.S. GAAP, Research and development includes costs incurred prior to technological feasibility for developed software that is to be sold, leased, or marketed.
Items that not qualified for research and development
Items not considered research and development include: Routine periodic design changes to old products or troubleshooting in production stage, marketing research, quality control testing and reformulation of a chemical compound.
Patent- Legal fee
Legal fees and other costs associated with registering a patent are capitalized.
Unsuccessful defense patent
Should be expensed
Successful defense paten
Should be capitalized and amortized, including purchase price, acquisition cost, legal fees.
Research and Development- materials, equipment,or facilities have alternate future usage
Are capitalized and depreciated over their useful lives.
Franchise-initial franchise fee
The franchisor should report revenue from initial franchise fees when all material conditions of the sale have been “substantially performed.”
Sale under an arrangement
When there is an unlimited right of return, nothing should be recorded as sales revenue unless four conditions are satisfied.
Unlimited right of return sell must meet these four conditions to recognized revenue:
The sales price is substantially fixed
The buyer assumes all risk of loss
The buyer has paid some form of consideration
The amount of returns can be reasonably estimated
Software developed internally, costs incurred IN the preliminary project stage
Expensed under U.S. GAAP
Software developed internally, costs incurred AFTER the preliminary project stage
capitalized and depreciated over the economic life
Revenues should be recognized
in the period in which they were earned and realized or realizable
Expenses are recognized
when an entity’s economic benefits are used up in delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations.
Start-up costs
GAAP requires that start-up costs, including organizational costs, be expensed
Goodwill should be tested for value impairment at which of the following levels under U.S. GAAP?
Each reporting unit.
If this sum of undiscounted expected (future) cash flows is less than the carrying amount,
Impairment loss or expense needs to be recognized
Subsequent reversal of intangible asset impairment losses
Under U.S. GAAP, is prohibited unless the intangible asset is held for sale.
Unearned franchise fees formula
cash payment
+ PV of future payments
=Franchise revenue/ unearned franchise fee
The matching principle:
Matches expenses against revenues in the same accounting period.
Goodwill should be tested for impairment at which of the following levels under IFRS?
Each cash-generating unit.
Deferred revenue related to gift certificate
When the gift certificates are sold, deferred revenue is increased.
When the certificates are redeemed, the revenue is earned and shown in the income statement. Deferred revenue is decreased.
When the certificates lapse, the company has no further liability and revenue is earned. Deferred revenue is decreased.
Under IFRS the development costs may be capitalized if all of the following criteria are met:
1) Technical feasibility has been established.
2) The company intends to complete the asset.
3) The company has the ability to sell or use the asset.
4) Sufficient resources are available to complete the development and sell / use the asset.
5) The asset will generate future economic benefits.
Finite intangible asset reported under US GAAP
Reported at cost - amortization -impairment
Infinite intangible asset reported under US GAAP
Reported at cost-impairment
Intangible asset reported under IFRS
Either the cost model or the revaluation model
Cost Model
Just like U.S. GAAP model Cost -amortization -impairment =carrying value (Finite life only)
Revaluation Model
Fair Value on revaluation date
-subsequent amortization
-subsequent impairment
=carrying value ( finite life only)
Where to report loss and gain under Revaluation Model?
Loss-I/S
Gain-OCI
To reverse loss from previous year, recognized revaluation gain on the I/S, then rest reported on OCI
Revaluation loss this year, prior year had gain, report loss to OCI first to offset gain, then rest I/S
Research and Development undertaken on behalf of other under a contractual arragement
Do Not Expensed
US GAAP- intangible asset (Infinite Life)
Life extend beyond the foreseeable future
No amortization
One step impairment test:
2. Fair value
Reporting of Impairment loss of intangible asset other than goodwill
Income from continuing operation unless is discounted operation
IFRS- Impairment loss of intangible asset
Step 2 model:
Recoverable amount
- Carrying value
=Impairment loss
Recoverable amount: GREATER OF:
Fair Value - cost to sell
Asset value in use ( PV of future cash flow)
Recoverable amount
GREATER OF:
- Fair Value less cost to sell
- Asset value in use
Asset value in use
Present value of future cash flow expected.
Impairment Intangible Asset other than Goodwill Loss: step one
Undiscounnted future net cash flow
- Net carrying value
=Positive (no impairment loss)
=Negative (impairment loss), go to step two
Impairment Intangible Asset other than Goodwill Loss: step two
Asset held for use:
Fair value
- Net carrying value
=impairment loss
Asset held for disposal: Fair value - Net carrying value \+Cost of dispodal =Total impairment loss
Goodwill impairment loss under US GAAP
Fair market of reporting unit less then carrying value of reporting unit
Goodwill impairment loss under US GAAP formula:
Impairment loss = Goodwill implied fair value - Goodwill book value
FV of reporting unit
- FV of reporting unit’ asset and liability
=Goodwill implied fair value
Goodwill implied fair value
FV of reporting unit
- FV of reporting unit’ asset and liability
=Goodwill implied fair value
Goodwill impairment loss under IFRS formula:
Impairment loss = Recoverable amount - Carrying value
*same as the impairment for “Intangible Asset other than goodwill”
US GAAP- intangible asset (Finite Life)
Useful life is limited Amortized over useful economic life Two step impairment test: 1. Undiscounted net cash flow 2. Fair value
Conversion: Cash –> Accrual
+ -
A + -
L - +
Conversion: Accrual–>Cash
+ -
A - +
L + -
