F2. Timing issues: Matching Revenue and expenses, correcting and adjusting accounts Flashcards
In general, what are the criteria for revenue recognition under U.S. GAAP?
To be earned and realized or realizable the following 4 must be met before revenue can be recognized.
- Persuasive evidence of an arrangement exists
- Delivery has occured or services rendered
- The price is fixed and determinable
- Collection is reasonably assured
What are the criteria for revenue recognition under U.S. GAAP when a Right to Return exists?
All 5 of these must be met:
- Sales price fixed @ date of sale
- Buyer assumes all risks of loss-assumes responsibility of goods
- Buyer has paid some form of consideration.
- Product sold is substantially complete
- The amount of future returns c/b reasonably estimated
What are the 4 categories of revenue transactions under IFRS and what are common revenue recognition criteria for those categories?
- Sales of goods
- Rendering of services
- Revenue from interest, royalties and dividends
- Construction contracts
* *Revenues and costs can be reliably measured
* *It is probable that economic benefits will flow to the entity. Each category has addt’l criteria.
When should revenue from the performace of services be recognized under U.S. GAAP and IFRS?
US. 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.
Name an example of both Accelerated and Deferred revenue recognition relative to normal recognition when revenue is recognized at the time goods are transferred.
Accelerated revenue recogniton: Percentage of completion method of long-term construction accounting.
Deferred revenue recognition: Installment (or cost recovery) method.
How are purchased intangible assets and internally developed intangible assets recorded under U.S. GAAP and IFRS?
Purchaed intangible assets: Under GAAP and IFRS first are recoreded at cost, including legal and registration fees.
Internally developed intangible assets: Under US GAAP and IFRS, legal fees, costs of successful defense, registration fees, consulting and design fees can be capitalized.
**For Research and devolopment fees US GAAP must be expensed. For IFRS, research costs must be expensed but development costs may be capitalized if they meet certain criteria.
What two methods of revenue recognition for long-term construction-type contracts are allowed under US GAAP and IFRS?
US GAAP:
*Percentage-of-completion
* Completed-contract
IFRS:
*Percentage-of-completion
*Cost RecoveryHow are intangible assets reported under US GAAP and IFRS?
US GAAP: Reported at cost less amortization (finite life intangibles only) and impairment
IFRS: Reported using the cost model (sames as US GAAP) or the revaluation model. Under the revaluation model, reported at FV @ revaluation date less subsequent amoritzation and impairment.
How should the contractual amounts of future services to be performed under a franchise agreement be accounted for by the 1) franchisor and 2) franchisee?
Franchisor: They should be recorded at their present value as unearned revenue until earned
Franchisee: as an intangible asset
Define Start-up costs and what are the treatment for them?
- Costs incurred for one-time activities to start a new operation. Startup costs are expensed in the period incurred in the formation of a corporation.
- Start-up costs are expensed in the period incurred.
Define Goodwill
- Excess of 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.
What is the maximum period over which an identifiable intangible asset (not goodwill) should be amortized?
- 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.
What is the proper treatment of Research and Development costs under US GAAP and IFRS?
US GAAP: R&D costs should be expensed as incurred unless it is for capital assets that have alternative future uses, or for R&D undertaken on behalf of other under a contractual arrangement.
IFRS: Research costs must be expensed while Development costs may be capitalized if they meet certain criteria.
List some items NOT considered R&D costs
- Routine periodic design changes
- Marketing research
- Quality Control Testing
- Reformulation of a chemical compound
When should the costs of developing computer software for resale, lease, or licensing be capitalized under US GAAP?
After techological feasability has been established and before the product is released for sale.
List some Software Costs that are capitalized and some that are expensed.
Capitalized: Coding, testing and producing masters incurred AFTER techological feasability has been est.
Expensed: Planning, desigh, coding and tesing incurred UNTIL technological feasability has been established.
What is the treatment of computer software develoved internally or obtained for internal use only under US GAAP?
- 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
- Capitalize costs should be amortized on a straignt-line basis.
What is the test of recoverability for the impairment of long-lived assets other than goodwill under US GAAP?
Finite Life: If undiscounted future cash flows expected from the use of the asset and eventual disposal is less t han the carrying value, recognize the loss on impairment.
Infefinite life: If fair value is less than carrying value, recognize loss on impairment.
How are Intangible Asset Revaluation gains and losses calculated and recorded?
Losses: Income statement (except when reversing a previous gain which then it would go to OCI)
Fair Value < Carrying Value before revaluation
Gains: Other Comprehensive income (only up to the extent of a previous loss to reverse it). Portion that reverses the loss goes to IS and remeining stays in OCI
Fair Value on revaluation date > carrying value
Describe the Intangible Asset Revaluation Model (FV)
- Asset is originally recorded at cost then revalued to Fair Value at subsequent valuation date.
- Revaluation model carrying value= Fair Value on revaluation date - subsequent amortization - subsequent impariment.
How is impariment of long-lived assets (not goodwill) analyzed under IFRS?
- 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).
