Timing Issues (Deck 2) Flashcards
Computer software development costs are expensed as R&D until when?
Until technological feasibility is established
How is amortization of capitalized software costs calculated?
The greater of straight-line amortization or sales revenue from the software for the period divided by total projected sale
How are R&D costs related to patents handled under US GAAP?
They are expensed
For patents, what life is used for amortization?
The lesser of the legal life or economic life
How are royalties paid accounted for?
Reported as expense in the period incurred
How is internal development of goodwill accounted for?
Expensed (cannot be capitalized)
How is R&D contracted out to 3rd parties reported as?
R&D expense for the entity
How is goodwill impairment calculated under IFRS?
Compare the carrying value of the CGU with the CGU’s recoverable amount. Impairment loss is recognized to the extent that the carrying value of the CGU exceeds the recoverable amount of the CGU impairment loss
How is an intangible asset franchise amortized?
Straight-line basis over the useful life
How does the franchisee account for the additional franchise fee it must pay to the franchisor?
Operating expense, unrelated to the intangible asset balance
When is goodwill capitalized?
Only when incurred in the purchase of another entity
How is a trademark amortized?
The cost of a trademark is amortized over its economic life
When is deferred revenue reported for service contracts?
When service contracts are sold (entire proceeds reported as deferred revenue)
Why is market research not considered R&D?
Because it is not aimed at discovery of new knowledge to develop a new product/service
What costs related to a patent are capitalized?
Legal fees and other costs associated with registering the patents
How should legal costs incurred to successfully defend an internally developed patent be accounted for?
It should be capitalized and amortized over the patent’s remaining economic life
How much revenue should be reported when a franchisor enters into a franchise agreement with a franchisee?
The entire initial franchise fee when all material conditions of the sale have been “substantially performed”
When there is a unlimited right of return, what 4 conditions must be satisfied in order for sales revenue to be recorded?
- Sales price is substantially fixed
- Buyer assumes all risk of loss
- Buyer has paid some form of consideration
- Amount of returns can be reasonably estimated
For software developed internally, how are costs accounted for AFTER the preliminary project stage?
Capitalized and depreciated over the economic life of the product
What should collections received for service contracts be recorded as?
Deferred revenue
When service contracts are sold, what are the effects on deferred revenue and service revenue?
Deferred revenue increases
Service revenue is not affected
For new software packages, how are costs that were incurred during the application development stage accounted for?
Expensed
Under US GAAP, at which level should goodwill be tested for value impairment?
Each reporting unit
How are start-up and organization costs treated in the financial statements?
Expensed immediately but deducted in later years for tax purposes
When is deferred revenue reported for service contracts?
When service contracts are sold (entire proceeds reported as deferred revenue)
Why is market research not considered R&D?
Because it is not aimed at discovery of new knowledge to develop a new product/service
What does the matching principle match?
It matches expenses against revenues in the same accounting period
How should legal costs incurred to successfully defend an internally developed patent be accounted for?
It should be capitalized and amortized over the patent’s remaining economic life
How much revenue should be reported when a franchisor enters into a franchise agreement with a franchisee?
The entire initial franchise fee when all material conditions of the sale have been “substantially performed”
When there is a unlimited right of return, what 4 conditions must be satisfied in order for sales revenue to be recorded?
- Sales price is substantially fixed
- Buyer assumes all risk of loss
- Buyer has paid some form of consideration
- Amount of returns can be reasonably estimated
For software developed internally, how are costs accounted for AFTER the preliminary project stage?
Capitalized and depreciated over the economic life of the product
What should collections received for service contracts be recorded as?
Deferred revenue
When service contracts are sold, what are the effects on deferred revenue and service revenue?
Deferred revenue increases
Service revenue is not affected
For new software packages, how are costs that were incurred during the application development stage accounted for?
Expensed
Under US GAAP, at which level should goodwill be tested for value impairment?
Each reporting unit
How are start-up and organization costs treated in the financial statements?
Expensed immediately but deducted in later years for tax purposes
If a franchise fee will not be earned until later, how is “unearned franchise fee” calculated?
Cash payment + PV of future payments = Unearned franchise fee
Why does R&D expense not include the amount paid for equipment purchased for current and future projects?
Because the equipment has alternate future uses
Related depreciation expense will be allocated to R&D while equipment is being used for R&D
What does the matching principle match?
It matches expenses against revenues in the same accounting period
How are all relevant costs to develop computer software for sale that are incurred before technological feasibility is established accounted for?
Should be expensed as R&D expenditures
After tech. feasibility is established, all relevant costs are capitalized until product released for sale
Under IFRS, what costs related to a patent purchase are capitalized?
Purchase price of a patent, VAT taxes, and legal costs to register patent
Under IFRS, at what level should goodwill be tested for impairment?
Each cash-generating unit (CGU)
Under IFRS, how is impairment loss calculated?
Impairment loss = Recoverable amount - Carrying value
What is the recoverable amount under IFRS?
The greater of the CGU’s FV less costs to sell and it value in use (PV of future CF)
Under GAAP, how is goodwill impairment loss calculated?
Impairment loss = Goodwill implied FV - Goodwill BV
What life should intangible assets be amortized over?
The lesser of the useful economic life or the legal life
Converting from cash-basis to accrual-basis
- Add increased in current assets
- Subtract decreased in current assets
- Add decreases in current liabilities
- Subtract increases in current liabilities
What is the proper treatment of the cost of equipment used in research and development activities that will have alternative future uses?
Capitalized and depreciated over its estimated useful life
What is the minimum operating cycle for purposes of reporting a “prepaid” current asset?
One year/12 months
Deferred revenue
It is a liability until the service has been performed
What would testing in search of a product/process alternatives be classified as?
R&D cost
When are costs associated with computer software that is developed to be sold/leased/licensed capitalized?
Once technological feasibility has been established
Under IFRS, can goodwill that is generated internally be capitalized?
No, it is treated as an expense in the period incurred
