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Revenue Recognition criteria GAAP
- 1. Persuasive evidence of an arrangement exists
- 2. Price is fixed and determinable
- 3. Risk/rewards of ownership has transferred
- 4. Product has been delivered/service substantially delivered
Revenue Recognition under IFRS
- Sale of Goods:
- (1) Rev/costs can b measured reliably
- (2) economic benefit likely to flow to entity
- (3) transfer of risk/rewards of ownership and
- (4) no managerial control once asset transferred
- Renderance of Service1. Rev/costs can be measured reliably
- 2. economic benefit likely to flow
- 3. Stage of completion of the transaction can b measured reliably
- Royalties, Interest, Divs1. Economic benefit likely to flow
- 2. Can be measured reliably
- Construction contracts1. rev/cost an be measured reliably
- 2. economic benefit likely 2 flow
- 3. contract cost and stage of completion can be measured reliably
Rev Recognition for Multiple Element Arrangements
Allocate fv of the contract to the different elements and recognize revenue separately for each element
Unearned/deferred revenue affects which F/S?
Journal entry for unearned rev
What condition must be met when the right to return exists?
- 1. Price is substantially fixed
- 2. Buyer paid consideration
- 3. Sell is complete
- 4. ROL transferred to buyer
- 5. Amt of return can be reasonably estimated
How can you acquire an intangible asset?
Purchase- record at cost and capitalize legal & registration fees
Internally develop- expense all costs except: successful legal defense fees, consulting fees, registration fees, design costs, direct costs to secure the asset
Research & Development expense recognition under GAAP & IFRS?
GAAP- expense all R&D costs except PPE that has alternate future uses and R&D contracted for another entity
IFRS- expense R&D costs but developmental costs that results in an intangible assets can be capitalized if tech feas can been established, the entity intends to complete the asset and the asset will generate future economic benefit
What type of intangible asset can be amortized?
Those with a definite life. Amortize the asset over its expected period of economic benefit.
What 2 ways can goodwill be calculated?
Acquistion method- the excess of the price to acquire the asset over the fv of the entity's assets.
Equity method- the excess of the stock price over the fv of the assets.
How are finite life intangible recorded vs. how indefinite life intangibles are recorded under U.S GAAP?
Finite life: cost-amortization-impairment loss
Indefinite life: cost- impairment loss
How are intangible assets recorded under IFRS?
Either using the cost method (cost-amortization-impairment) or using the revaluation method.
Describe the revaluation method
The revaluation method is a method specific to IFRS. When there is an intangible asset it is first recorded at cost but then revalued at a "revaluation date". The asset's revaluation carrying value= FV at revaluation date-amorization-impairment losses
Describe the handeling of revaluation losses/gains?
A revaluation loss occurs when the fv as of the revaluation date<carrying value. The loss is generally recognized in the income statement unless there was a previously recorded revaluation gain. If there was then the loss will first reverse the gain in OCI and any remaining loss will hit the I/S.
A revaluation gain is recognized in OCI (revaluation surplus) unless there was a previously recorded revaluation loss. If there was the gain would first reverse the loss on the income statement and any remaining gain would then be recognized in OCI.
What do you do if a revalued intangible becomes impaired?
Reverse any revaluation gains in OCI and recognize the remaining impairment loss in the I/S.
For a franchisee how are initial franchise fees and continuing frachise fees recorded?
Initial fees are recorded as an intangible asset and amortized. Continuing fees are expensed
Computer software can be developed for which purpose(s)?
- 1. To be sold or leased
- 2. Internal use
There are different accounting rules depending on the purpose/use of the sofware.
How do you account for computer software development costs for the purpose of being sold/leased under GAAP?
Expense all costs up until the date that technological feasibility is established
Capitalize all costs between the date of tech feas-product release date.
Amortize all costs from the release date and beyond
How do you account for computer software development costs that has internal use purposes under GAAP?
Expense all costs incurred during the prelimary project state (like tech feas) including training and maintenance
Capitalize all costs incurred after the prelimary project stage including upgrades/enhancements.
If the entity changes its mine and decides to sell the software then it first must recover all costs on the books and then recognize the remainder as revenue
How do you calculate annual amortization for computer software development costs?
- The greater of:
- (1) Revenue Percentage: Total capitalized amount * (Current period gross rev/ total expected gross rev)
- (2) Straight line: Total cap amt/economic life
How do determine if there is an impairment loss of a finite life intangible asset under GAAP?
First to determine if the asset is impaired compare its carrying value to its expected undiscounted CFs. If CV> undiscounted CF then there is a loss. The amount to be recognized is equal to the difference between the FV of CF and its carrying value (+ disposal costs if its held for disposal).
Impairment loss is recognized in Income from Continuting Operations and cannot be reversed in the future, unless its held for disposal.
How do you determine if there is an impairment loss for indefinite intangible assets under GAAP?
Compare the FV to the CV. If FV<CV then recognize the difference as a loss in the Income from continuing operation section of the I/S.
Journal entry to record impairment loss of goodwill?
How do you determine the impairment loss for a finite intangible asset under IFRS?
Compare the asset's carrying value to its recoverable amount. If CV>RA then there is a loss.
Recoverable amount= the greater of (1) FV-cost to sell and (2) FV of asset in use. Asset in use= pv of CF. Reversal of previously recorded impairment loss is allowed.
How do you determine the impairment loss for an indefinite intangible asset under IFRS?
Compare the CV for the cash generating unit to the recoverable amount of the cash generating unit.
CGU is the smallest reportable asset group independently generating rev separate from other assets
How do you determine the impairment loss of goodwill under GAAP
Goodwill is calculated at the reporting unit level so the goodwill of one reporting unit can be impaired while the goodwill of another may not be. To determine a loss compare the FV of the reportable unit to its CV
When is it appropriate to use completed contract method
- 1. When its difficult to estimate the cost while the contract is in progress.
- 2. Projects are short and collections are not assured
For a completed contract when is a current asset and current liability recognized?
- 1. When costs are greater than billings (Due on account & Construction in Progress)
- 2. When billings are greater than costs (Advances, deposits, retainers, etc)
How do you determine the profit or loss to be recognized under completed contract method?
Contract price- total actual costs
What are the completed contract rules under IFRS?
Completed contract method is prohibited under IFRS.
When is the percentage of completion method appropriate?
- 1. Collections are reasonably assured
- 2. Accting system can reasonably estimate profitability and measure completion
What is the advantage/disadvantage of using the % of completion method?
It provides accurate status of the completion of a contract and recognition of income periodically. The disadvantage is that it estimates costs.
How do you calcualte recognition of revenue under the % of completion method?
Total costs 2 date/Total estimated contract costs= GP%
- Gross Proft*GP%=
- Income to recognize
- - previous recorded p/l
- Profit to date
How is a change in long term contract method treated?
As a change in accounting principle and retrospectively
When is it appropriate to use installement of sales method?
When there is no reasonable degree to estimate collectability
When do you recognize income under the installement of sales?
When cash is collected. Realized gross profit= GP% x cash collected
For the installment of sales how do you calculate deferred revenue?
GP% x installement receivable
How is expected profit recognized on the b/s for the cost recovery method
As deferred gross profit and is not realized on the I/S until all cost have been recovered.
Primary decision qualities under GAAP vs IFRS?
- GAAP- Predictive value, feedback value, and timeliness
IFRS- Predictive value, feedback, materiality
- ReliabilityGAAP- Neutrality, rep faithfulness, verifiability
IFRS- Same as GAAP+ substance over form, prudence, completeness
Pervasive contraints under GAAP vs. IFRS
GAAP- Cost/benefit and materiality
IFRS- cost/benefit, timeliness, and qualitative qualities
For discontinued operations, how is a component measured?
The lower of carrying value or net realizable value (FV-cost to sell)
What factors are included in the calculation of income/loss from discontinued operations?
Impairment losses, gain/loss from actual operations, and gains/loss from disposal
Under IFRS, what action is necessary before a component can be classified as H4S?
The assets/liabilities must be remeasured and any gains/losses must be recognized before it be can classified as H4S.
What are the classifications for marketable securities under GAAP vs IFRS?
- 1. Trading Security (Financial Assets at FV through P&L-IFRS only)
- 2. A4S
- 3. H2M
How are trading securities valued and where are unrealized gains/lossed recognized?
Valued at FV and G/Ls recognized on the I/S
How is a unrealized gain/loss created?
FV changes of assets
How are A4S securities valued and where are unrealized g/l recognized?
Valued @ FV and unrealized G/L recognized in OCI (PUFER)
How do you handle foreign exchange G/Ls on A4S securities under IFRS?
A4S Debt security's unrealized G/L recognized on the I/S
A4S equity security's G/L recognized in OCI.
When you do realized a g/l for trading and A4S securities?
When the security is actually sold and when A4S securities are impaired
How do you value a H2M security?
At cost and amortize. There are no unrealized G/Ls.
How do you reclassify any trading security to another marketable security?
Do not reverse any unrealized g/l on the I/S
How do you reclassify any marketable security to a trading security?
recognize unrealized g/ls on the date of transfer immediately
How do you reclassify a H2M to A4S security?
recognize unrealized g/l in OCI
How do you reclassify A4S to H2M?
Amortize into I/S any unrealized g/l that was recognized in OCI previously
Can I recover a previously recorded impairment loss of a marketable security under GAAP/IFRS?
- GAAP- no
- IFRS- yes for H2M and A4S securities with the amount of the reversal recognized on the I/S
Where do you recognize a change in FV for H2M securities?
Changes in FV for H2M securities under are not recognized
Where do you recognize subsequent increases in FV for A4S securities?
Where do you recognize subsequent decreases in FV for A4S securities?
OCI and book a unrealized loss
What are the conditions for recognizing FV increases in marketable securities on the I/S?
This is not allowed. These increase are recognized in OCI.
When should you not consolidate f/s under IFRS?
1) The parent is a wholly or partially owned sub to another parent
2) Parent is not publically traded
How do you account for consolidations of companies that have different year ends under GAAP and IFRS?
GAAP- disclose significant transactions that occur in the gap period
IFRS- sub's f/s must be adjusted for significant transactions
Under the cost method, how should the investment account be recorded?
At FV + any legal fees
Under the Cost Method how are marketable securities treated?
- Mark to market. Recognize unrealized g/l
- in OCI.
- Unrealized loss
- Valuation acct
What is distinctive about the Cost Method?
It recognizes dividend income and marks to market securities.
What is the journal entry for a liquidating dividend under the Cost Method?
- Investment in investee
What is the major difference between the equity and cost method (other than control %)
The equity method does not recognize dividends as income but rather a reduction in the cost basis of the investment. In addition, the investment account is increased by the ownership % in the investee earnings.
- Invmt in investee $XXX
- Investee income XXX
Under the equity method how do you account for difference btw the purchase price and nbv of investee's assets?
If there is a premium, determine which asset the premium is attributable to and then amortize the premium over the life of the asset (only if it has a finite life). You cannot amortize for land or other assets w/no finite life. The amortization expense reduces share in investee's income and in the basis of the invmt
- Investee Income $XXX
- Invmt XXX
What method is joint ventures accounted for under GAAP and IFRS
- GAAP- Equity method
- IFRS- Equity & Proportionate consolidation (being phased out)
How do you handle a change from the cost method to the equity method?
Retroactively and adjust R/E and invmt in investee acct.
Apply the new equity method to the prior cost method periods using the old ownership percentage.
- Invmt $XXX
- R/E XXX
- Unreal loss XXX
Under GAAP, how do you calculate NCI using the the full goodwill method?
NCI% x FV of subsidiary
How do you calculate the NCI using the partial goodwill method.
This method is allowable under IFRS.
NCI% x FV of net identifiable assets
When a subsidiary pays a dividend how does this effect the consolidated b/s?
- No effect on parent's R/E
- Decreases NCI on the B/S
How do you recognize in-process R&D and continuing R&D under the acquisition method?
IP R&D is an intangible asset and will be capitalized while continuing R&D will be expensed immmediately. If the IP R&D results in successful project then it will amortize. If it is unsuccessful we will write it off.
How do you calculate Goodwill using the Full Goodwill Method (GAAP)?
FV of subsidiary- FV of sub's net identifiable assets
How do you calculate Goodwill using the Partial Goodwill Method (IFRS)?
Acquisition cost- % of FV of sub's net assets acquired
When is a gain recognized under the acquisition method?
When acquisition costs is less than FV of assets acquired. The gain is a credit
Under the acquisition method, what do you if you go from no control to control?
Remeasure previously held equity interest to fv and recognize the adjustment on the I/S
Under the acquisition method, what do you if you go from control to more or less control?
No gain or loss is recognized. Adjust APIC
Under the acquisition method, what do you if you go from control to no control
- 1. Recognize g/l from sale of the stock
- 2. remeasure the remaining non- consolidated interest to fv
- 3. recognize any adjustments on the I/S
On Jan 1, yr 1 P company acquires 80% of S company's 100,000 shares of CS for $1,600,000. 4 yrs later, P sells 50,000 shares for $25/share. What is the total gain to be recognized in year 5 I/S?
- $250k on sale
- $150k on the remeasurement of the remaining 30,000 shares
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