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When revenue is recognized (GAAP)?
When it is realized or (realizable) and when it is earned
What is the criteria for revenue to be recognized?
- Persuasive evidence(Signed contract)
- Delivery has occurred or services have been rendered (risk and rewards)
- Price is fixed
- Collection is reasonable assured
What is criteria for revenue recognition under IFRS?
- Measured reliable
- Economic Benefit
- Entity has transferred to the buyer the risk and reward of ownership
- Entity does not retain managerial involvement
How do you measure rendering of services under IFRS?
% of Completion method
Where is deferred revenue located?
Liability until earned
What is the J/E for Unearned revenue?
- DR: Cash
- CR: Unearned Revenue
What is the J/E to recognize unearned revenue?
- DR: Unearned Revenue
- CR: Earned Revenue
How do you recognize income when the right of return exists?
- It should be recognized at the time of sale unless the following conditions are NOT met then it is deferred:
- Price is substantially fixed
- Buyer assumes all risks
- Buyer has paid some form of consideration
- Product is substantially complete
- Amount of returns can be reasonable estimated
What is an intangible asset and how do you account for it?
- Patent, copyrights, franchises, trademarks, goodwill
- Purchased Intangible Assets = Record at Cost
- Internally developed Intangible assets = Expense
What costs associated with an Intangible asset internally developed that should be capitalized(GAAP)?
- Legal Fees
- Registration or Consulting Fees
- Design Costs
- Other direct costs secured to the asset
What types of costs for an internally developed intangible asset must be expensed(IFRS)?
Can a internally developed intangible asset be capitalized(IFRS)?
- Yes if the following are met:
- Technological Feasible has been established
- Entity intends to complete Intangible asset
- Entity has ability to use or sell Intangible asset
- Intangible will generate future economic benefits
- Adequate resources are available to complete the development and sell or use the asset
How do you measure costs of an intangible assets acquired from other enterprises or individuals?
- NEEDS TO BE ARMS LENGTH TRANSACTION
- Amount of Cash disbursed or FV of other assets distributed(whichever is more clearly evident)
- PV of amounts to be paid for liabilities incurred
- FV of consideration for stock issued
How long is a patent amortized?
Shorter of estimated or remaining legal life
Can you amortize Goodwill?
NO Goodwill is checked for Impairment
Under US GAAP how are intangible assets valued?
- Cost less Amortization and Impairment
- Indefinite life intangible assets are reported at cost less impairment
Under IFRS how are intangible assets valued?
Cost model like GAAP
Revaluation Model = FV on Revaluation date – Subsequent amortization – Subsequent Impairment
Under IFRS Revaluation Model how are Gains and loss accounted for?
- Revaluation Losses – Income Statement
- Revaluation Gains – OCI
- If revalued intangible assets subsequently become impaired the impairment is recorded by first reducing and revaluation surplus to 0 and further losses are reported on the IS
How do you account for Start-Up and organization costs?
What is Goodwill and how do you handle the costs to maintain Goodwill?
Capitalized excess earnings power
How do you account for R & D Costs(GAAP)?
- Expense them
- Materials, equipment or facilities that have alternate future uses – Capitalize
- R&D costs undertaken on behalf of others under contractual agreement should be expensed as cost of sales and Disclose
What are some items not considered R&D(GAAP?
- Routine periodic design changes to old products
- Marketing research
- QC testing
- Reformulation of Chemical Compound
How do you account for R & D Costs(IFRS)?
Research costs must be expensed but development costs may be capitalized if certain criteria are met
How do you account for Computer Software developed to be sold,leased or Licensed(GAAP)?
Expense costs incurred until technological feasibility has been established then Capitalize up to the point of the product released for sale
How do you amortize for software costs?
- GREATER OF:
- % of Revenue = Total Capitalized amount * current gross revenue for period/total projected gross revenue
- Straight Line = Total Capitalized amount * 1/Estimated economic life
How is capitalized software costs reported on the BS?
Capitalized software costs are reported at lower of cost or market where market is equal to the NRV
How do you amortize an intangible asset with indefinite life?
What is the impairment test for intangible assets with FINITE lives?
- 2 Step Impairment test
- Use undiscounted future net cash flows
- Step 1 – carrying amount of the asset is compared to the sum of the undiscounted cash flows expected
- Step 2 – if the carrying amount exceeds the total undiscounted future cash flow then the asset is impaired and an impairment loss equal to the difference between carrying amount of the asset and FV is recorded
What is the impairment test for intangible assets with INDEFINATE lives?
Use FV -if the carrying amount exceeds the total undiscounted future cash flow then the asset is impaired and an impairment loss equal to the difference between carrying amount of the asset and FV is recorded
How do you report for an impairment loss?
- Component of Income from continuing operations before Income taxes
- Carrying amount of asset is reduced by amount of Impairment Loss
- Restoration of previously recognized Impairment losses is prohibited unless the asset is held for disposal
How is an impairment loss accounted for Under IFRS?
- Use FV -if the carrying amount exceeds the total undiscounted future cash flow then the asset is impaired and an impairment loss equal to the difference between carrying amount of the asset and FV is recorded
- IFRS allows the reversal of Impairment losses
How do you account for Goodwill Impairment(GAAP)?
- Calculated at the reporting unit level. Impairment exists when the carrying amount of the reporting unit exceeds it FV
- Step 1 – identify potential impairment by comparing FV of each reporting unit with its carrying amount, including goodwill
- Step 2 –Measure the amount of goodwill impairment loss by comparing the implied FV of the reporting units goodwill with the carrying amount of that goodwill
How do you account for Goodwill Impairment(IFRS)?
Goodwill impairment testing is done at the cash generating unit level. Use one step test
What is the Completed-contract method?
- GAAP Only
- Recognizes income only on completion of contract
- Used for short duration projects
How is Completed-contract method displayed in BS/IS?
- Excess of accumulated costs over related billings should be reflected as current asset and excess of accumulated billings should be current liabiltilty
- Current Asset – Due on Accounts, Construction in Progress
- Current Liability – Progress billings on uncompleted contracts in excess of cost
- Losses should be recognized in the year they are discovered(Rule of conservatism)
How do you calculate % of completion method?
Cost incurred/total expected cost=work done/total expected work=% of job earned
How do you handle losses using the % of completion method?
Loss provision for entire contract should be made when current estimates indicate a loss. However previous gross profit or loss reported in prior years my be adjusted when calcing the total estimated loss
What is the advantages/disadvantages of the % of completion method?
- Advantage: Accurate reporting of status of the uncompleted contracts
- Accrual method
- Disadvantage: Relies on estimates
When is revenue recognized for installment sales?
- When cash is actually collected
- Cash method
What is the BS presentation for Installment sales?
- Accounts Receivable
- Less: Deferred Gross Profit(Contra Asset)
When are sales recognized under the cost recovery method?
- No profit is recognized on a sale until all costs have been recovered. At the time of sale the expected profit on the sale is recorded as deferred gross profit. Cash collection are first applied to the recovery of product costs. Collections after all costs have been recovered are recognized as profit.
- Use only where there is no reasonable basis for estimating their collectivity
How does GAAP categorize exchanges?
- An exchange has commercial substance if the future cash flows change as a result of the transaction
- Cash given up is used to calculate the buildings basis
- Have commercial substance – Gain/Loss Recognized
- Lack commercial substance – Always recognize losses
- If Gain lacking commercial substance
- No Boot Received = No Gain
- Boot Paid = No Gain
- Boot Received greater than 25% of all consideration – All gain recognized
- Boot Received less than 25% of all consideration - % of gain recognized
How does IFRS characterize nonmonetary exchanges of similar assets and dissimilar assets?
- Exchanges of Dissimilar like having commercial substance under GAAP
- Dissimilar assets are not regarded as exchanges that generate revenue no gains are recognized
How are involuntary conversion handled(i.e fire loss,theft)
Entire Gain/Loss is recognized
How are contributions to a Partnership recorded?
- Assets at FV
- Liabilities at PV
What are the methods to recognize a new partnership interest?
- Exact Method (equal to book value) –No goodwill or bonus-Old Partners capital account stay the same
- Bonus Method – when purchase price is more or less than the book value of the capital account purchased
- Goodwill Method – recognized based upon the total value of the partner implied by the new partnerships contribution
What is Nominal and constant dollars?
- Nominal – unadjusted for changes in purchasing power
- Constant – restated based on calc of CPI ratios
What is the basis used in GAAP Financial statement
Historical Cost/Nominal dollars
What are monetary and non-monetary items?
- Monetary assets and liabilities are fixed or denominated regardless or changes in specific prices or the general price level (Cash, bonds, long term receievables)
- Non-Monetary assets and liabilities fluctuate in value with inflation and deflation (Marketable common stock, PP&E, Inventory)
What is the Exchange Rate Direct Method, Indirect Method, Spot Rate?
- Direct – Ours to theirs
- Indirect – Theirs to ours
- Spot – Year end rate or current date rate
What Forex rate is used for income statement and equity(stock issuance)?
- Weighted average – Income statement
- Historical Exchange rate is for equity
What is the remeasurement method(temporal) dysfuncational method?
- The FS of the foreign subsid are not in the subsids functional currency, the fs are remeasured to the functional currency starting with BS
- FS are remeasured starting with BS
- Monetary items = Spot Rate
- Non-monetary items = historical rate
- Income statement
- Non-BS items –weighted average reate
- BS Items = historical rate
- Translation gain/loss = IS
What is the translation method (current method)?
- the foreign subsids are in the subs functional currency, the fs are translated to to the reporting currency starting with IS
- IS= Weighted average rate
- Assets=Current/YE rate
- Liabilties = Current/YE rate
- Common stock- Historical rate
- RE = rollforward
- Translation gain/loss = OCI
How are personal financial statements valued?
What is the BS presentation of Commercial Substance Exchanges?
Record the asset on the BS at FV
What is the BS Presentation of exchanges that Lack Commercial substance?
Record the asset received on the BS at the NBV of the asset surrended,minus any boot received(or plus any boot paid) plus any gain recognized(minus loss recognized) on the transaction