FAR - Specific Transactions, Events, & Disclosures - Nonmonetary exchanges Flashcards
Related Parties
a partner in transaction can significantly influence the transaction/event/policy
EX: investees, affiliates, pension trusts, owners, family members
Related Party Transactions & Disclosures
- Not arms length because 1 can significantly influence other party or both parties subject to influence of 3rd party
EX: affiliated companies, family
- DISCLOSURES = MANDATORY in footnotes of financials
Research & Development
- R/D costs expensed for OWN company
- intangibles purchased & tangibles with alternative future uses are capitalized & depreciated/amortized over estimated useful life as R/D expense
- amount of R/D exp must be disclosed on face of I/S or footnotes
R/D Activities
1) lab research - new knowledge
2) new research findings
3) conceptual formulation
4) evaluate process alternatives
5) modify designs
6) preproduction
7) design new tech
8) construct pilot not useful
9) advance design to MFG stage
NON - R/D Activities
1) Commercial production/Engineering
2) Quality control
3) troubleshoot during MFG
4) improve existing production
5) adapt existing capability
6) periodic changes to existing product
7) routine design of tools
8) start facility
9) legal work (patent app)
10) acquire, develop, improve product/process
Elements of R/D
1) materials, equip, facilities:
- acquired for R/D, no alternative use, charge to R/D
- alternative uses exist, costs are capitalized
- salaries, wages, related costs
2) intangibles purchased treated as materials
- if capitalized, amortize over U/L
3) R/D services performed by others
- reasonable allocation of indirect costs
(exclude general/admin costs not related to R/D)
Gaap vs IFRS - R/D costs
GAAP:
Research/Develop costs are expensed
IFRS:
- Research costs are expensed
- Developmental costs are capitalized
Research
attempt to discover new knowledge aimed at the development of new products, services, processes, or techniques, or the significant improvement in an existing product
fixed assets used in a single research and development (R&D) project with no alternative use accounted for?
Entire cost expensed as R&D immediately
assets used in several research and development (R&D) projects accounted for?
Capitalized and depreciated to R&D expense
Areas of concern
Required disclosure of vulnerability to conditions/events capable of materially affecting financials in near yr
- FASB now requires disclosures if conditions give rise to substantial doubt about entities ability to continue as going concern
Sources of risk/uncertainty
- nature of entity’s operations
- use of estimates in financials
- certain significant estimates
- vulnerability to significant concentrations
- Going concern assessment
Nature of operations
info about firm’s products/services, location, markets
- relative importance of each business type
- not required to be quantitative
Use of estimates
Disclose that estimates:
1) required for many financial statement items
2) are approximations
3) require assumptions about future events
Certain significant estimates
estimates - reasonable chance of change such that its effect could be material OR estimate will change within 1 yr of when financials were isued
disclosures:
- nature of uncertainty
- estimated effect of change in estimate
- effect of change in est. on financials
Standard provides examples of areas susceptible to est. changes including:
- Fair Valuation
- Inventory
- Equip Obsolescence
- Valuation allowances for DTAs
- Impairment testing
- Contingencies
Vulnerability due to significant concentrations
concentrations = aspects with insufficient diversification
EX: 1 firm with 60% revenues from 1 client
severe impact = significant financial disruption due to vulnerability to significant concentration
Vulnerability due to significant concentrations
Disclosures
1) volume of business with customer, supplier, lendor, grantor, contributor
2) revenue from specific products, services, fund-raising sources
3) specific sources of services, materials, labor, licenses
4) market/geo area of operations
Vulnerability due to significant concentrations
Disclosure - meeting 3 criteria
1) concentration exists @ b/s date
2) entity = vulnerable b/c of concentration to risk of “severe impact” could cause significant financial disruption to firm in near term
3) reasonably possible (less than probable) that events causing severe impact will occur in near term
* required disclosures that meet above conditions, enable users to assess risk/possible outcomes
Segment Reporting
corps operate diverse set of businesses
GAAP requires disclosures by major segments to allow assessment of those segments
3 focuses:
1) what is a segment?
2) which segments must report this info?
3) what info is reported?
Operating Segment
Identified by mgmt as significant component meeting these criteria
1) Generates revenues/expenses
2) Chief Operating Decision maker reviews results
3) Provides financial info about operations
Reportable segments
Operating segment meeting at least 1 of 3 quantitative tests
- Not all firm components are operating segments; not all operating segments are reportable segments
3 quantitative tests for reportable segment
1) revenue
2) operating profit (loss)
3) identifiable assets
- each uses 10% or more
- if a test is met, operating segment = reportable segment
Segment Reporting
Test 1 - Operating Revenue
Segment’s revenue (internal + external) that is >/= 10% of combined revenues of all operating segments
Segment Reporting
Test 2 - Operating Profit
FIRST:
Compute 2 amounts and use larger absolute value
- combined operating profit of all operating segments reporting positive profit
- combined operating loss of all operating segments reporting an operating loss
SECOND:
If absolute value of operating segment’s operating profit/loss = >/= 10% of larger amount above, then = reportable segment
Segment Reporting
Test 3 - Identifiable Asset
Operating segment’s identifiable assets that are >/= 10% of combined assets of all operating segments
Segment Reporting
Revenue Rule (added measure to assess significant segment)
( Sales to unaffiliated customers / Consolidated revenues ) >/= 75% of consolidated revenues
*more than 10 reportable segments may exceed cost-benefit constraint
Segment Reporting
Reportable Segment Disclosures
- segment description
- factors to identify segments
- types of products/services
- earnings, total assets
- external revenue & internal revenue
- depreciation, amortization, and depletion
- unusual & infrequent expenses
- income tax expense
- interest revenue/expenses
- required for interim reporting
- reconciliation needed between segments = items & consolidated items
- restate previously reporting info for changes in internal organization
Segment Reporting
Entity-wide Disclosures
- info about products, services, geo areas
- 1 customer accounts for 10% or more of firm’s revenues, that fact must be disclosed
true/false
Only one needs to be met for a segment to be reportable
segments cannot be counted twice to be reportable!
true
true/false
public business enterprise report financial and descriptive information about its reportable operating segments
true
Capitalization of Software costs
1) firm can capitalize costs related to internal development of computer software once software reached TECHNOLOGICAL FEASIBILITY
2) Technological feasibility = point when program/model is complete, but not on market yet
Computer Software Costs
Acct @ Each Stage
R/D -> Expensed
Technological Feasibility -> Capitalize
Marketing -> Depreciate
Computer Software Costs
Amortization
Annual amortization =
greater of
1) S/L Amortization OR
2) Current Revenue X Cost / Total Expected Revenue
Computer Software Costs
GAAP vs IFRS
GAAP
Software costs expensed until technological feasibility
IFRS
Software costs related to research are expensed, costs are capitalized
Cloud Computing Software Costs
1) acquisition of software license should be capitalized
2) service contract should be expensed
Criteria for Software Liability
1) customer has contractual right to take possession of software at any time during hosting period w/o significant penalty
significant penalty = customer can take delivery w/o incurring costs/can use software separately w/o significant reduction in utility/value
2) It’s feasible for customer to either run software on it’s own hardware OR contract with another party unrelated to vendor to host software
revenue method for computer software.
BV @ BOY X proportion of current yr revenue to toral remaining expected revenues including current yr revenues
software production costs accounted for?
Capitalize to inventory and expense as cost of goods sold
cost of developing software for internal purposes is true/false
expensed up to the “application development stage” at which point the effort appears to be leading to a useable application. After that point, costs are capitalized. capitalized costs are amortized over the useful life of the product.
true
Subsequent Event
occur after b/s date, but before financials are issued
EX: uncollectible A/R, lawsuits, debt/securities issuance, major acquisitions
- FULL DISCLOSURE NEEDED
Subsequent Events
condition @ b/s date
condition not at b/s date
conditions existed @ b/s date:
RECOGNITION in Financials
conditions did not exist @ b/s date:
DISCLOSURES in footnotes
Subsequent Events
GAAP vs IFRS
GAAP
1) cut-off date = when financials issued/available to issuance
2) require adj. for share splits after b/s date and before financials are issued
3) refinancing, amendments/waivers considered in determining debt classification as current/non-current
IFRS
1) cut-off date = financials considered authorized for issuance
2) doesn’t require adj. for share splits after b/s date and before financials are issued
3) refinancing, amendments/waivers, NOT considered in determining classification of debt as current/non-current
When can refinancing current debt be classified as noncurrent?
1) Issue stock to extinguish debt;
2) Refinance current liab with a noncurrent liab;
3) Enter into an irrevocable agreement to refinance the current liability with a noncurrent liability.
true/false
Any difference between the estimated and actual loss is treated as a change in estimate in a future period
true
