Timing Issues Flashcards
Assets
Probably future economic benefits that are obtained or controlled by a particular entity as a result of past events/transactions
Liabilities
Probably future sacrifices of economic benefits that an entity faces for obligations to provide services/transfer assets due to past events/transactions
Revenues
Increases of assets or reductions of liabilities (and possibly both) during a period of time
When should revenue be recognized?
When it is realized (or realizable) and earned
What are the four criteria that must be met for each element of a contract before any revenue can be recognized?
- Persuasive evidence of an arrangements exists (signed contract)
- Delivery has occurred/services rendered (risks/rewards transferred)
- Price is fixed and determinable (no price contingencies)
- Collection is reasonable assured (standard collection terms)
When is revenue from the sales of products or disposal of other assets recognized?
On the date of sale of the product/other assets
What are the four criteria apply for a sale (exchange) to take place?
- Delivery of goods/setting aside goods ordered
- Transfer of legal title
- Use of assets (when revenue stems from use of assets)
- Revenue for services rendered is recognized in period services were rendered and billable
IFRS revenue recognition conditions for sale of goods
- Revenue/costs for the transaction can be measured reliably
- It is probable that economic benefits from transaction will flow to the entity
- Entity has transferred to the buyer the significant risks/rewards of ownership
- Entity does not retain managerial involvement tot he degree associated with ownership or control over the goods sold
IFRS revenue recognition conditions for rendering services
- Revenue/costs can be measured reliably
- Probable that economic benefits from transaction will flow to entity
- Stage of completion of transaction at end of reporting period can be measured reliably
IFRS revenue recognition conditions for interest, royalties, and dividends
- Revenue can be measured reliably
2. Probable economic benefits will flow to entity
Multiple element arragements
When a sales contract includes multiple products/services, the FV of the contract must be allocated to separate contract elements
Revenue recognized separately for each element
Deferred credit
When cash is received before it is earned (i.e. unearned revenue)
Expenses
Reductions of assets or increases of liabilities (and possibly both) during a period of time
Should be recognized according to the matching principle
Realization
Real world
Occurs when the entity obtains cash or the right to receive cash or has converted a noncash resource into cash
Recognition
Record
The actual recording of transactions/events in the FS
Matching principle
Expense must be recognized in the same period in which the related revenue is recognized (when it is practicable to do so)
Accrual accounting
Process of employing the revenue recognition rule and the matching principle to the recognition of revenues and expenses
Deferral
Occurs when cash is received/expended but is not recognizable for FS purposes
Expired costs
Costs that expire during the period and have no future benefit (i.e. insurance, COGS, period costs)
Unexpired costs
Should be capitalized and matched against future revenues
Where are deferred credits located in the FS?
The liability section of the BS
When is royalty revenue recognized?
When it is earned
Journal entries fro the collection and recognizing of earned royalties
Paid in advance/BS only:
Dr. Cash
Cr. Unearned royalty
Earned/IS impact:
Dr. Unearned royalty
Cr. Earned royalty
What conditions must be met in order for revenue from sales where the buyer has the right to return the product to be recognized?
- Sales price is substantially fixed at date of sale
- Buyer assumes all risks of loss b/c goods are considered in buyer’s possession
- Buyer has paid some form of consideration
- Product sold is substantially complete
- Amount of future returns can be reasonably estimated
What types of fees does franchise accounting involve?
- Initial franchise fees
2. Continuing franchise fees
Initial franchise fees
Paid by franchisee for receiving initial services from the franchisor (revenue when “substantially performed”)
Continuing franchise fees
Received for ongoing services provided by the franchisor to the franchisee (revenue when earned)
“Substantial performance” means (franchise accounting):
- Franchisor has no obligation to refund any payment received
- Initial services required of the franchisor have been performed
- All other conditions of the sale have been met
Intangible assets
Long-lived legal rights and competitive advantages developed or acquired by business
Under US GAAP, what do you do to research and development costs?
Expense
What are exceptions to expensing costs associated with intangibles?
Capitalize:
- Legal fees and other costs related to SUCCESSFUL defense of asset
- Registration/consulting fees
- Design costs
- Other direct costs to secure the asset
What does the classification of intangible assets depend on?
- Identifiability
- Manner of acquisition
- Expected period of benefit
- Separability
Under IFRS, how are research and development costs handled?
Research costs related to internally developed intangible assets are expensed
Development costs are capitalized
What type of intangibles should be amortized?
Those with finite lives
For how long is a patent amortized?
The shorter of its estimated life or remained legal life
How should a company record the cost of intangible assets acquired from other enterprises or individuals in an “arm’s length” transaction?
As assets (capitalize)
What type of intangibles require the impairment approach rather than amortization?
Goodwill
Under IFRS, how can intangible assets be reported?
Under the cost model or the revaluation model
Cost model
Intangible assets are reported at cost adjusted for amortization (finite life intangibles only) and impairment
Revaluation model
Intangibles are initially recognized at cost and then revaluated to fair value at a subsequent revaluation date
Revaluation carrying model = FV on revaluation date - Subsequent amortization - Subsequent impairment
Revaluation losses
FV on revaluation date < carrying value before revaluation
Reported on IS
What happens if a revaluation loss reverses a previously recognized revaluation gain (the exception)?
It is recognized in OCI and reduces revaluation surplus in AOCI
Revaluation gains
FV on revaluation date > carrying value before revaluation
Reported in OCI and accumulated in equity as revaluation surplus
What happens if revaluation gains reverse a previously recognized revaluation loss?
It is recognized in the IS to the extent of the loss
How is impairment recorded under the revaluation model?
Recorded by first reducing any revaluation surplus in equity to zero with further impairment losses reported on the IS
How is the initial franchise fee recorded by the franchisee?
Recorded as an intangible asset on the BS and amortized over the expected period of benefit
How are continuing franchise fees reported by the franchisee?
As an expense in the period incurred
What do start-up costs include?
One time activities associated with:
- Organizing new entity
- Opening new facility
- Introducing new product or service
- Conducting business in a new territory/with new class of customer
- Initiating a new process in an existing facility
Goodwill
The representation of intangible resources and elements connected with an entity (capitalized excess earnings power)
Under the acquisition method, how is goodwill calculated?
The excess of an acquired entity’s FV over the FV of the entity’s net assets
How are costs associated with maintaining, developing, or restoring goodwill handled?
They are expensed
Under US GAAP, how are research and development costs handled?
Expensed
What are the exceptions to R&D expensing under US GAAP?
- Materials, equipment, or facilities that have alternative future uses (capitalize and depreciate)
- R&D costs of any nature undertaken on behalf of others under a contractual arrangement
What are the criteria that must be met in order for development costs to be capitalized under IFRS?
- Technological feasibility has been established
- Entity intends to complete the intangible asset
- Entity has the ability to use or sell the intangible asset
- Intangible asset will generate future economic benefits
- Adequate resources are available to complete the development and sell or use the asset
Technological feasibility
Established upon completion of:
- Detailed program design
- Completion of working model
How are costs associated with computer software developed to be sold, leased, or licensed accounted for?
- Expensed until technological feasibility has been established
- Capitalize after technological feasibility has been established up to the point that the product is released for sale
What method is used for the amortization of capitalized software costs?
The greater of:
- Percentage of revenue
- Straight line
How are costs associated with computer software developed internally or obtained for internal use only?
- Expense costs incurred for the preliminary project state and costs incurred for training/maintenance
- Capitalize costs incurred after the preliminary project state and for upgrades/enhancements
If software previously developed for internal use is subsequently sold to outsiders, how are the proceeds accounted for?
Applied first to the carrying amount of the software then recognized as revenue
Two-step impairment test for intangible assets with finite lives
- The carrying amount of the asset is compared to the sum of the undiscounted CF expected to result from the use of the asset and its eventual disposition
- If carrying amount exceeds total undiscounted CF, then asset is impaired and impairment loss equal to difference b/w the carrying amount of asset and its FV is recorded
One-step impairment test for intangible assets with indefinite lives
Compare FV of intangible asset to its carrying amount. If asset’s FV is less than carrying amount, an impairment loss is recognized in amount equal to difference
What are the two steps involved in evaluating goodwill impairment?
- Identify potential impairment by comparing the FV of each reporting unit with its carrying amount, including goodwill
- Measure the amount of goodwill impairment loss by comparing the implied FV of the reporting unit’s goodwill with the carrying amount of that goodwill
When are quantitative impairment tests not necessary?
If, after assessing the relevant qualitative factors, an entity determines that it is not more likely than not that the FV of the reporting unit or indefinite life intangible asset is less than its carrying amount
What is the private company accounting alternative of goodwill accounting?
- Amortize goodwill on straight-line basis over 10 years, or less than 10 years if it can demonstrate that another useful life is more appropriate
- Make acct policy election, disclosed in SSAP in footnotes, to test goodwill for impairment at either entity level or reporting unit level when triggering event occurs that indicates that FV of entity may be below carrying amount
Cash-generating unit
The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets
