FAR 2-1: Timing Issues Flashcards
In general, what are the criteria for revenue recognition under U.S. GAAP?
Earned & realized or realizable. The following 4 criteria must be met before revenue can be recognized:
- Persuasive evidence of an arrangement exists
- Delivery has occurred or services have been rendered
- The price is fixed & determinable
- Collection is reasonably assured
What are the 4 categories of revenue transactions under IFRS & what are the common revenue recognition criteria for those categories?
- Sales of goods
- Rendering of services
- Revenue from interest, royalties, & dividends
- Construction contracts
Common revenue recognition criteria include:
- Revenues & costs can be reliably measured
- It is probable that economic benefits will flow to the entity
Each category has additional criteria
When should revenue from the performance of services be recognized under U.S. GAAP & IFRS?
- U.S. GAAP: In the period in which the services have been rendered & are able to be billed
- IFRS: Using the percentage of completion method when the outcome of the transaction can be estimated
What are the conditions for revenue recognition when the right of return exists?
- The sales price is substantially fixed at the time of sale
- The buyer assumes all risks of loss because 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
Name an example of both 1) accelerated & 2) deferred revenue recognition relative to normal recognition when revenue is recognized at the time goods are transferred
- 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
How are purchased intangible assets & internally developed intangible assets recorded under U.S. GAAP & IFRS?
Purchased intangible assets:
*Recorded at cost, including legal & registration fees, under U.S. GAAP & IFRS
Internally developed intangible assets:
- Legal fees, costs of successful defense, registration fees, consulting fees, & design fees can be capitalized under U.S. GAAP & IFRS
- Under U.S. GAAP, R&D costs must be expensed. Under IFRS, research costs must be expensed, but development costs may be capitalized if they meet certain criteria
How are intangible assets reported under U.S. GAAP & IFRS?
- U.S. GAAP: Reported at cost less amortization (finite life intangibles only) & impairment
- IFRS: Reported using the cost mode (same as U.S. GAAP) or the revaluation model. Under the revaluation model, reported fair value on revaluation date less subsequent amortization & impairment
How should the contractual amounts of future services to be performed under a franchise agreement be accounted for by 1) the franchisor & 2) the franchisee?
They should be recorded at their present value as unearned by the franchisor until earned & as an intangible asset by the franchisee
Define start-up costs
What is the accounting treatment of start-up costs?
- Costs incurred for 1-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
Define goodwill
- 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
What is the maximum period of time over which an identifiable intangible asset (not goodwill) should be amortized?
- The shorter of its estimated useful economic life & its 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 R&D costs under U.S. GAAP & IFRS?
- U.S. GAAP: R&D costs should be expensed as incurred unless an expenditure is for capital assets that have alternative future uses, or for R&D 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
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 U.S. GAAP?
After technological feasibility has been established & before the product is released for sale
How should the costs of capitalized computer software developed for resale be amortized under U.S. GAAP?
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)
