Timing Issues: Matching, Correcting, Adjusting Flashcards
date revenue is recognized
date of sale
when assets are used
when services are rendered
revenue recognition
GAAP
ALL must be met:
- signed contract/confirmation in writing
- delivery occurred, services rendered
- no price contingencies
- collection is reasonable assured
revenue recognition for goods
IFRS
ALL must be met:
- revenue/costs measured reliably
- economic benefit will flow to entity
- transferred title
- no retained managerial involvement
revenue recognition for services
IFRS
ALL must be met:
- revenue/costs measured reliably
- economic benefit will flow to entity
- stage of completion can be measured reliably
revenue recognition for interest/royalties/dividends
IFRS
ALL must be met:
- revenue measured reliably
- probably economic benefit will flow to entity
revenue recognition for construction contracts
IFRS
ALL must be met:
- revenue/costs measured reliably
- economic benefit will flow to entity
- contract costs AND stage of completion can be measured reliably
revenue recognition for multiple element arrangements
GAAP
- FV of contract must be allocated to separate contract elements
- revenue recognized separately based on criteria for each element
deferred credits
reported when cash received but not yet earned
recognized as liability then as revenue when earned
i.e. “unearned” or deferred revenue (interest, rental, royalty)
installment sales
recognized as collections are made
cost recovery method
no profit recognized on sale until all costs have been recovered
non monetary exchanges
recognized when revenue depends on type of exchange
involuntary conversions
conversions due to fire, theft, etc. of non-monetary asset to cash
resulting in gain/loss
percentage of completion contract accounting
revenue recognized as production takes place for LT construction contracts having costs reasonably estimated
use completed contract method otherwise
realization
occurs when cash or right to receive cash is obtained
percentage of completion contract accounting
revenue recognized as completed for LT construction contracts, provided costs are reasonably estimated
use completed contract method otherwise
recognition
actual recording of transaction/event in the F/S
matching principle
expenses recognized in same period related revenue is recognized
accrual accounting
process of employing revenue recognition rule AND matching principle to recognition of revenues/expenses
required by GAAP, no I/S or current cash impact
deferral
occurs when cash is received/used but is not recognized for F/S purposes
typically results in recognition of liability/prepaid expense
no I/S or B/S (cash) impact
accrued assets/revenues
recognition of accrued asset represents revenue recognized
earned but not yet paid
estimated liabilities
recognition of probable future charge that result from a prior act
accrued liabilities/expenses
represent expenses recognized
incurred but not yet paid
expired costs
expensed on I/S
i.e. insurance, COGS, SG&A
unexpired costs
stays on B/S (for now) as asset or deferred charge
capitalized and matched against future revenues
i.e. fixed assets, inventory
prepaid expenses
unexpired cost that becomes expired cost
- relate expenses with residual value
- future right to services
deferred charges
unexpired cost that becomes expired cost
- expenses or accruals that cannot be charged to tangible asset (bond issue costs)
- intangible assets/non-current prepaid items
royalty revenue
recognized when earned
based on stated percentage of sales
unearned revenue
revenue received in advance
recorded as a liability
revenue recognition when right of return exists
time of sale if ALL conditions are met:
- sales price substantially fixed
- buyer assumes all risks
- paid some form of consideration
- product sold is substantially complete
- amount of future returns can be reasonably estimated
- NOT a contingent sale
franchises
involves 2 types of fees: initial and continuing
initial franchise fees
franchisor
revenue when “substantially performed”
continuing franchise fees
franchisor
revenue when earned
unearned revenue
franchisor accounting
initial franchise fees (not yet earned)
prepaid continuing franchise fee
recognized as revenue once substantial performance as occurred
earned revenue
franchisor accounting
“substantial performance”
- franchisor has no obligation to refund any payment
- initial services required of the franchisor have been performed
- all other conditions of the sale have been met
purchased intangible asset
CAPITALIZE
record as an asset at cost
include legal/registration fees
internally developed intangible asset
EXPENSE
i.e. trademarks
goodwill from advertising
cost to develop/maintain/restore goodwill
legal fees for successful defense
internally developed intangible asset
capitalize
R&D
internally developed intangible asset
expense
registration/consulting fees
internally developed intangible asset
capitalize
design costs (internally developed intangible asset)
capitalize
direct costs to secure asset
internally developed intangible asset
capitalize
legal fees for unsuccessful defense
internally developed intangible asset
expense
test for impairment
R&D for internally developed intangible asset
GAAP vs IFRS
GAAP, expensed except for:
- assets with alternate future use (depreciate over useful life)
- costs of any nature on behalf of others under contract (expensed as cost of sales)
IFRS, research MUST be expensed; development may be capitalized if ALL are met:
- technological feasibility established
- entity intends to complete asset
- entity has ability to use/sell asset
- asset will generate future economic benefit
- enough resources to complete development and sell/use asset
capitalization of costs
amount of cash disbursed or FV of other assets distributed
PV of amounts to be paid for liabilities
FV of consideration received for issued stock
cost of identifiable assets
does NOT include goodwill
cost of unidentifiable intangible assets
cost of assets/enterprise acquired
= sum of costs assigned to identifiable assets - liabilities assumed
amortization
asset must have FINITE life
method of amortization
straight-line method
goodwill amortization
not amortized (indefinite life) test for impairment at least annually
(amortize over 15 years for tax purposes ONLY)
patent amortization
amortized over shorter of:
- estimated life
- remaining legal life
intangible asset becomes worthless
expense, write off entire remaining cost
i.e., obsolescence or unsuccessful legal defense
intangible asset becomes impaired
expense
write down asset and recognize impairment loss
intangible asset has a change in useful life
recalculate amortization over new remaining life
intangible asset is sold
calculate and recognize gain or loss
intangible asset valuation
GAAP vs IFRS
GAAP, reported at cost (less amortization/impairment)
IFRS, cost model or revaluation model
revaluation model (IFRS valuation of intangible asset)
initially recognized at cost then reevaluated to FV on revaluation date less subsequent amortization/impairment
revaluations must be performed regularly
revaluation losses
FV on revaluation date < carrying value
reported on I/S
if loss reverses previous gain, report on OCI and reduce revaluation surplus in AOCI
revaluation gains
FV on revaluation date > carrying value
reported in OCI and accumulated in equity as revaluation surplus
if gain reverses previous loss, report on I/S
revaluation and impairment
impairment of revalued intangible asset is recorded by:
- reduce any revaluation surplus in equity to 0
- further impairment loss reported on I/S
initial franchise fee
franchisee
recorded as intangible asset on B/S
amortized over expected life of franchise
continuing franchise fees
franchisee
expense as incurred
start up costs
expense (including organizational costs)
may elect up to $5,000, reduced by amount exceeds $50,000
any excess amortized over 180 months
acquisition method
goodwill
excess of acquired entity’s FV over FV of entity’s net assets
(including identifiable intangible assets)
equity method
goodwill
involves purchase of company’s capital stock
excess of stock purchase price over FV of net assets acquired
maintaining goodwill
expense
routine periodic design changes
not R&D
marketing research
not R&D
quality control testing
not R&D
reformulation of chemical compound
not R&D
developing goodwill
expense
restoring goodwill
expense
technological feasibility
established upon completion of:
- detailed program design
- completion of a working model
computer software development cost
sold/leased/licensed
expensed until technological feasibility established, then capitalize
(i.e., coding, testing, producing product masters)
percentage of revenue
amortization of capitalized software costs
total capitalized amount
x (current period / total projected gross revenue for period)
computer software development cost
sold/leased/licensed
expensed until technological feasibility established (planning, design, testing)
then capitalize
(i.e., coding, testing, producing product masters)
straight-line
amortization of capitalized software costs
= total capitalized amount / estimate of economic life
computer software development cost
internal use
expensed until after preliminary project state, then capitalize
(i. e., training and maintenance - expense)
(i. e., materials/services, employee, interest - capitalized)
computer software internally developed then sold
proceeds applied to carrying amount of software, then recognized as revenue
impairment of finite life intangibles
2-step impairment test
1) CV of asset vs sum of undiscounted FCF
2) if CV > total FCF, recognize impairment loss
use FV or discounted FCF to calculate loss
impairment of indefinite life intangibles
1-step impairment test
if CV > total FCF, recognize impairment loss
use FV or discounted FCF to calculate loss
reporting an impairment loss
goes on income from continuing operations
restoration of previously recognized impairment loss is PROHIBITED (unless held for disposal)
calculating impairment loss
GAAP vs IFRS
GAAP, 2-step or 1-step depending on life of asset
IFRS, other than goodwill, asset tested for impairment using 1-step only:
- CV vs recoverable amt
recoverable amount is greater of:
- FV less cost to sell
- PV of FCF
allows reversal of impairment loss
asset held for disposal
impairment
no depreciation taken
restoration permitted
asset held for use
impairment
depreciate new cost
restoration not permitted
goodwill impairment
calculated at reporting unit level
exists when CV > FV
2 steps: identifying and measuring impairment
reporting unit
operating segment with separate cash flows
management regularly reviews it
identifying goodwill impairment
compare FV and CV of each reporting unit
assign goodwill
measuring goodwill impairment loss
allocate FV of reporting unit to all A/L
any that can’t be assigned is implied goodwill
=implied goodwill FV - goodwill CV
once loss recognized, cannot be reversed
testing qualitative factors for impairment
macroeconomic, industry/market conditions
overall financial performance
entity-specific events
US GAAP, no need for quantitative test IF:
- 50% or less chance FV < CV (not more likely than not)
goodwill impairment
GAAP vs IFRS
GAAP, done at reporting unit level
IFRS, done at cash-generating unit level
CV of CGU vs CGU’s recoverable amount
recoverable amount is greater of:
- FV less cost to sell
- PV of FCF expected from CGU
impairment loss first allocated to goodwill then on pro rata basis to other assets of CGU
cash-generating unit
smallest identifiable group of assets that generates cash inflows independently
goodwill accounting
private companies
AMORTIZE goodwill on straight-line basis over 10 years (less if more appropriate)
impairment less likely to occur but make policy in SSAP to test for impairment at entity or reporting unit level when appropriate
correcting/adjusting accounts
match related expenses with their revenues
change in current assets
cash to accrual basis
add increases
subtract decreases
change in current liabilities
cash to accrual basis
subtract increases
add decreases
