F2 - Timing Issues: Matching of Revenue and Expenses, Correcting and Adjusting Accounts

Question 1

In general, what are the criteria for revenue recognition under U.S. GAAP?

Answer 1

Earned and realized or realizable. The following four criteria must be met before revenue can be recognized:

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

Question 2

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

Answer 2

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

Common revenue recognition criteria include:

• Revenues and costs can be reliably measured.
• It is probable that economic benefits will flow to the entity.

Each category has additional criteria.

Question 3

When should revenue from the performance of services be recognized under U.S. GAAP and IFRS?

Answer 3

U.S. GAAP

In the period in which the services have been rendered and are able to be billed.

IFRS

Using the percentage of completion method when the outcome of the transaction can be estimated reliably.

Question 4

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

Answer 4

• The sales price is substantially fixed at the time of sale.
• The buyer assumes all risks of loss becuase the goods are considered in the buyer’s possession.
• The buyer has paid some form of consideration.
• The product sold is substantially complete.
• The amount of future returns can be reasonably estimated.

Question 5

Name an example of both 1) accelerated and 2) deferred revenue recognition relative to normal recognition when revenue is recognized at the time goods are transferred.

Answer 5

• The percentage-of-completion method of long-term construction accounting is an example of accelerated revenue recognition.
• The installment method (or cost recovery method) is an example of deferred revenue recognition.

Question 6

How are purchased intangible assets and internally developed intangible assets recorded under U.S. GAAP and IFRS?

Answer 6

Purchased intangible assets:

Recorded at cost, including legal and registration fees, under U.S. GAAP and IFRS.

Internally developed intangible assets:

• Legal fees, costs of successful defense, registration fees, consulting fees, and design fees can be capitalized under U.S. GAAP and IFRS.
• Under U.S. GAAP, research and development costs must be expensed. Under IFRS, research costs must be expensed, but development cost may be capitalized if they meet certain criteria.

Question 7

How are intangible assets reported under U.S. GAAP and IFRS?

Answer 7

U.S. GAAP

Reported at cost less amortization (finite life intangibles only) and impairment.

IFRS

Reported using the cost model (same as U.S. GAAP) or the revaluation model. Under the revaluation model, reported at fair value on revaluation date less subsequent amortization and impairment.

Question 8

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

Answer 8

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

Question 9

Define start-up costs.

What is the accounting treatment for start-up costs?

Answer 9

• 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 10

Define goodwill.

Answer 10

• Excess of the fair value of a subsidiary over the fair value of the subsidiary’s net assets.
• Costs of maintaining and/or developing goodwill cannot be capitalized.

Question 11

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

Answer 11

• 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 must be tested at least annually for impairment.

Question 12

What is the proper treatment of research and development costs under U.S. GAAP and IFRS?

Answer 12

U.S. GAAP

Research and development costs should be expensed as incurred unless an expenditure is for capital assets that have alternative future uses, or for research and development 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 13

List some items not considered research and development costs.

Answer 13

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

Question 14

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

Answer 14

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

Question 15

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

Answer 15

Annual amortization is the greater of:

Percent of Revenue Method

Total capitalized amount x Current gross revenue for
_ the period _
Total projected gross revenue
for product

Straight-line

Total capitalized amount x _ 1 _
Estimate of economic life

Question 16

Outline the treatment of computer software developed internally or obtained for internal use only under U.S. GAAP?

Answer 16

• Expense costs incurred in the preliminary project state and costs incurred in training and maintenance
• Capitalize costs incurred after preliminary project state and for upgrades and enhancements
• Capitalized costs should be amortized on a straight-line basis.

Question 17

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

Answer 17

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 18

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

Answer 18

• Compare the carrying value of the asset to the asset’s recoverable amount.
• The recoverable amount is the greater of the asset’s fair value less costs to sell and the asset’s value in use (PV of future cash flows).

Question 19

What is the calculation for impairment loss under U.S. GAAP and IFRS?

Answer 19

U.S. GAAP

The amount by which the carrying amount exceeds the fair value of the asset.

IFRS

The amount by which the carrying amount exceeds the asset’s recoverable amount.

Question 20

How is goodwill impairment analyzed under U.S. GAAP?

Answer 20

Goodwill impairment is analyzed at the reporting unit level using a two-step process:

1. Identify potential impairment by comparing the fair value of each reporting unit with its carrying value, including goodwill.
2. Measure the amount of goodwill impairment by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount.

Note: Under U.S. GAAP, the goodwill impairment test has been simplified by allowing companies to test qualitative factors first to determine whether it si necessary to perform the two-step goodwill impairment test.

Question 21

How is goodwill impairment analyzed under IFRS?

Answer 21

Goodwill impairment testing is done at the cash generating unit (CGU) level using a one-step test that compares the carrying value of the CGU to the CGU’s recoverable amount.

Impairment losses are first allocated to goodwill and then allogated on a pro rata basis to the other CGU assets.