Module 26.1: Capitalization vs. Expensing Flashcards
What is an expenditure?
rather than putting as expense on the IS, an expenditure is a balance sheet item that provides future economic benefit.
What part of an expenditure gets capitalized vs. expensed?
all costs that provide future economic benefits including costs that are necessary to get the asset ready for use.
Repair, maintenance, and training costs are expensed as incurred.
Can interest be capitalized if used to finance construction under GAAP and IFRS?
Yes, interest expense can be capitalized and hit the income statement through depreciation (if held for use) or COGS (if asset is held for sale).
Under IFRS what are the three characteristics of an identifiable intangible asset?
1) Capable of being separated from the firm or arise from a contractual obligation
2) Controlled by the firm
3) Expected to provide future economic benefits
What is an unidentifiable intangible asset?
the most common is goodwill, not all unidentifiable are reported on balance sheet, has to do if the asset was created internally, purchased externally, or obtained as part of a business combination.
Under IFRS what are research costs, are they expensed as incurred?
aimed at the discovery of new scientific or technical knowledge and understanding. Yes, expensed as incurred.
Under IFRS what are development costs, are they expensed as incurred?
may be capitalized. dev costs are incurred to translate research findings into a plan or design of a new product or process.
Under GAAP, are research and development costs capitalized?
no, both are expensed as incurred except for software. Under GAAP, costs incurred to develop software are expensed until the products feasibility, then capitalized.
What are the financial statement affects of capitalizing?
higher net income in the first year, lower in future years.
Assets, equity, and operating cash flow are also higher.
What is the acquisition method?
purchase price is allocated to the identifiable assets and liabilities of the acquired firm on the basis of fair value. The remaining amount is allocated to goodwill.
