Timing Issues Flashcards
Revenue Recognition (GAAP)
Revenue recognized when it is realized (realizable) and when it is earned.
Requirements:
- Persuasive evidence of an arrangement exists
- Delivery has occurred or services have been rendered
- Price is fixed and determinable
- Collection is reasonably assured
Revenue from sale of products or disposal of assets is recognized on date of sale.
Revenue from performance of services recognized in period the services have been rendered.
Revenue Recognition (IFRS)
Four Categories (different recognition rules):
- Sales of Goods
- Rendering of Services
- Revenue from Interest, Royalties, and Dividends
- Construction Contracts
Rev. Recognition - Sales of Goods (IFRS)
Meet all conditions:
- Revenue & costs incurred for the transaction can be measured reliably.
- Probably that economic benefits from the transaction will flow to the entity.
- Entity has transferred to the buyer the significant risk and rewards of ownership.
- Entity does not retain managerial involvement to the degree associated with ownership or control over the goods sold.
Rev. Recognition - Rendering of Services (IFRS)
Recognized using the % of completion method.
- Revenue & costs incurred for the transaction can be measured reliably.
- Probable that economic benefits from the transaction will flow to the entity.
- Stage of completion of the transaction at the end of the reporting period can be measured reliably.
Rev. Recognition - Revenue from Interest, Royalties, and Dividends (IFRS)
Use by others of the entity’s assets.
- Revenue can be measured reliably.
- Probably economic benefits from the transaction will flow to the entity.
Rev. Recognition - Construction Contracts (IFRS)
Recognized as revenues and expenses using the % of completion method.
- Contract revenue and contracts costs attributable to the transaction can be measured reliably.
- Probably that economic benefits from the transaction will flow to the entity.
- Both the contract costs to complete the contract and the stage of contract completion at the end of the reporting period can be measured reliably.
Loss recognized immediately.
Multiple Element Arrangements (GAAP)
When a sales contract includes multiple products/services, the fair value of the contract must be allocated to the separate contract elements. Revenue is then recognized separately for each element based on the revenue recognition criteria appropriate for each element. No revenue until job is done. Break into bite size pieces.
Deferred Credits/Liability
- Earn it or Return it
When cash is received before it is earned, a deferred credit is reported. A deferred credit is recognized as revenue as it is earned.
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 and events in the financial statements.
Matching Principle
Expense must be recognized in the same period in which the related revenue is recognized.
Accrual Accounting
Income Statement impact/not current cash impact
Required by GAAP and is the process of employing the revenue recognition rule and the matching principle to the recognition of revenues and expenses.
Deferral
No current income statement impact/balance sheet impact. There is a cash impact.
Deferral of rev/exp will occur when cash is received or expended but is not recognizable for FS purposes. Results in the recognition of a liability or a prepaid expense.
Expired Costs (expenses)
Expense on Income Statement
Costs that expire during the period and have no future benefit.
- Insurance expense
- COGS
- Period costs (selling, general, and admin expenses)
Unexpired Costs
Stay on balance sheet (for now) - either asset or deferred charge. Unexpired costs (fixed assets and inventory) should be capitalized and matched against future revenues.
Prepaid Expenses (current assets)
- prepaid expenses relate to expenditures with a residual value
- future right to services
Deferred Charges
- Results from expenditures or accruals that cannot be charged to a tangible asset, but that do pertain to future operations.
- May include intangible assets and non-current prepaid items.
Deferred Credits (unearned or deferred revenue)
- Future income contracted for and/or collected in advance.
- Located in the liability section of the balance sheet.
Royalty Revenue
Recognized when earned. Requires accrual of the provision for revenues based on estimated sales.
Unearned Revenue (earn it or return it)
Revenue received in advance is recorded as a liability bc it is an obligation to perform a service in the future and is reported as revenue in the period in which it is earned.
Revenue Recognition when the Right to Return Exists
Revenue recognized at time of sale if all requirements met, if not all conditions are met then revenue shall be deferred:
- Sale price is substantially fixed at the date of sale
- Buyer assumes all risk of loss bc goods are considered in the buyer’s possession
- Buyer has paid some form of consideration
- Product sold is substantially complete
- Amount of future returns can be reasonably estimated
Intangible Assets
Long-lived legal rights and competitive advantages developed or acquired by a business enterprise.
Identifiability of Intangible Assets
- Patents, copyrights, franchises, trademarks, and goodwill
- Specifically identifiable (patents, copyrights, franchises, etc.) or not specifically identifiable (goodwill).
Purchased Intangible Assets
- Recorded as an asset at cost
- legal and registration fees incurred to obtain an intangible asset should also be capitalized
Internally Developed Intangible Assets
- Expensed against income when incurred (no capitalization of R&D costs)
- Exception for certain costs to be capitalized:
a) legal fees and other costs related to successful defense of the asset
b) registration or consulting fees
c) design costs
d) other direct costs to secure the asset
*unsuccessful defense is expensed and test asset for impairment
IFRS rules for Intangible Assets
Research costs related to an internally developed intangible asset must be expensed, but an intangible asset arising from development is capitalized.
Amortization
- must have a finite life
- amortized by systematic charges to income over the period estimated to be benefited.
- straight-line method
- does not include intangible assets with indefinite lives…goodwill (test for impairment annually)
- patent is amortized over the shorter of its estimated life or remaining legal life
Worthless Intangible
Write off the entire remaining cost to expense.
Impairment of Intangible
Write down the intangible asset and recognize an impairment loss if an intangible asset becomes impaired.
Change in Useful Life of Intangible
If the life of an existing intangible asset is reduced or extended, the remaining net book value is amortized over the new remaining life. (recalculate)
Sale of Intangible
Compare its carrying value at the date of sale with the selling price to determine gain or loss.
Income Tax Effect of Intangibles
Amortization of acquired intangible assets that are not specifically identifiable (goodwill) is deductible over a 15-yr period in computing income taxes payable.
Valuation of Intangible under US GAAP
- finite life intangibles are reported at cost less amortization and impairment.
- indefinite life intangibles are reported at cost less impairment.
Cost Model for Intangibles (IFRS)
Intangibles are reported at cost adjusted for amortization and impairment. (finite life only)
Revaluation Model for Intangibles (IFRS)
Fair Value on Revaluation Date
Less: Subsequent amortization
Less: Subsequent impairment
= Revaluation Model CV
- performed regularly
Revaluation Losses
- reported on the income statement
- a revaluation loss that reverses a previously recognized revaluation gain is recognized in OCI and reduces the revaluation surplus in AOCI
Revaluation Gains
- reported in OCI and accumulated in equity as revaluation surplus
- gains are reported on the income statement to the extent that they reverse a previously recognized revaluation loss
Impairment
If revalued intangibles subsequently become impaired, the impairment is recorded by first reducing any revaluation surplus in equity to zero with further impairment losses reported on the income statement.
Initial Franchise Fees (franchisee)
The PV of the amount paid by a franchisee is recorded as an intangible asset on the balance sheet and amortized over the expected period of benefit of the franchise.
Continuing Franchise Fees (franchisee)
Based on a % of franchise revenues. Fees should be reported by the franchisee as an expense and as revenue by the franchisor, in the period incurred.
Start-Up Costs
Expenses incurred in the formation of a corp. are considered organizational costs. Expensed when incurred. NOT capitalized.
Goodwill
The representation of intangible resources and elements connected with an entity. Goodwill means capitalized excess earnings power.
Acquisition Method - Goodwill calculation
Goodwill is the excess of an acquired entity’s fair value over the fair value of the entity’s net assets, including identifiable intangible assets.
Maintaining Goodwill
Costs associated with maintaining, developing, or restoring goodwill are not capitalized as goodwill, they are expensed. Goodwill generated internally or not purchased in an arm’s length transaction is not capitalized as goodwill.
R and D Costs (GAAP)
Direct charge to expense
- don’t expense tangible assets used (capitalize and depreciate), and don’t expense R and D costs undertaken on behalf of others under a contractual agreement.
R and D Costs (IFRS)
- Research costs are expensed
- Development costs may be capitalized if certain criteria met
Computer Software Development Costs (IFRS)
IFRS does not provide separate guidance on computer software development costs. These are treated as internally generated intangibles…research costs expensed and development costs capitalized.
Technological Feasibility
Established upon completion of:
- a detailed program design, or
- completion of a working model
Accounting for Costs - Computer Software Developed to Be Sold, Leased, or Licensed
- Expense costs (planning, design, coding, and testing) incurred until technological feasibility has been established.
- Capitalize costs incurred after technological feasibility has been established up to the point product is released for sale.
Amortization of Capitalized Software Costs
Annual amortization (product by product basis) is the GREATER of:
- Percentage of Revenue
- Straight-line
Percentage of Revenue equation
Total capitalized amt * current gross revenue for period/total projected gross revenue for product
Accounting for Computer Software Developed Internally or Obtained for Internal Use Only
- Expense costs incurred for the preliminary project state and costs incurred for training and maintenance.
- Capitalize costs incurred after the preliminary project state. Amortize on straight-line basis.
- If software previously developed for internal use is subsequently sold to outsiders, proceeds received should be applied first to the carrying amount of the software, then recognized as revenue.
Intangible Assets with Finite Lives (two-step impairment test)
- Step 1: carrying amt of the asset is compared to the sum of the undiscounted cash flows expected to result from the use of the asset and its eventual disposition.
- Step 2: If the carrying amount exceeds the total undiscounted FCF, then the asset is impaired and an impairment loss equal to the difference between the carrying amt of the asset and its fair value is recorded.
Intangible Assets with Indefinite Lives (one-step impairment test)
- Use Step 2 from impairment test of intangibles with finite lives. (amt of impairment - use fair value)
Reporting an Impairment Loss
Reported as a component of income from continuing operations before income taxes, unless related to discontinued operations. Carrying amt of the asset is reduced by the amt of the impairment loss.
Goodwill Impairment (GAAP)
Calculated at the reporting unit level. Impairment exists when the carrying amt of the reporting unit goodwill exceeds its fair value.
Reporting Unit
An operating segment, or one level below an operating segment. Separate cash flows. Mgt regularly reviews it.
Evaluation of Goodwill Impairment
Step 1 - Identify potential impairment by comparing the fair value of each reporting unit with its carrying amt, including goodwill.
Step 2 - Measure the amt of goodwill impairment loss by comparing the implied fair value of the reporting unit’s goodwill with the carrying amt of the goodwill.
