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US GAAP R&D expenses include
- R&D contracted to a third party
- Preproduction prototype and models costs
- Costs for searching for new products or product alternatives
Amortization of Trademarks
Amortized at cost over estimated remaining life.
How are legal costs incurred to successfully defend an internally developed patent dealt with?
Capitalized and amortized over the patents remaining useful economic life.
Internally developed software expense/depreciation
- Costs incurred in preliminary project stage are expensed.
- Costs after preliminary project stage are capitalized over useful life of the software.
How is training employees to use new internally developed software handled?
Expenses in the year incurred. Not capitalized.
Patent becomes worthless before end of life
Expense the rest not taken previously
At what level is goodwill tested for impairment under US GAAP?
Each reporting unit
Convert from accrual revenue to cash revenue
Add revenue unearned and revenue then subtract receivables
Effect of receivables on revenue in accrual basis
receivables increase revenue
Reversal of impairment losses
- US GAAP=prohibited
- IFRS=reversed to extent of loss taken
How are legal fees to obtain a patent treated?
capitalized as intangible asset
How are costs for computer software for sale treated?
- Costs incurred before technological feasability are expenses as R&D
- Costs incurred after technological feasability are capitalized until the product is held for sale then goes through inventory and COGS
Capitalizable costs to obtain a patent under IFRS
Purchase price, VAT, legal costs to obtain it.
At which level should goodwill be tested for impairment for IFRS?
Cash generating unit
How do you determine goodwill impairment under IFRS?
- impairment loss=recoverable amount-carrying value
- recoverable amount=cash generating units carrying value less costs to sell or value in use (PV of FCF expected from CGU)
Amortization of intangible assets
- intangible must be identifiable with finite life. Amortized over lesser of economic life or legal life.
- Goodwill and assets with indefinate lives are not amortized, but are subject to impairment testing.
How are initial franchise fees treated?
- Capitalized by franchisee over period benefited (assumed life of a franchise is 10 yrs)
- Revenue to franchisor when earned (in year operations begin)
What are the four conditions for revenue recognition?
- 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
Completed Contract method
- Recognizes income upon completion of the construction contract. Does not match revenue with expenses.
- Recognizes estimated losses immediately
Percentage of completion method
- Recognizes revenue over the term of the project based on estimated profitability and cost estimates.
- Recognizes estimated losses immediately
How are long term constuction contracts recognized under IFRS?
- Completed contract method is not permitted.
- Percentage of completion method must be used unless
- Final outcome of the project cannot be reliably estimated. In that case use cost recovery method
How are continuing franchise fees treated?
Revenue to franchisor and expense to franchisee in period incurred.
- Used when collectibility cannot be reasonably estimated.
- Revenue recognized as cash is collected based on GP Rate
Cost recovery system
- Used when collectibility is even more doubtful than for installment sale
- no revenue until cost of asset has been recovered.
Deferred gross profit on an installment sale
(sales-collections from sale-write offs)*GP%=deferred gross profit
Installment sale deferred gross profit % for year x
deferred gross profit for year x / a/r for year x sales=deferred gross profit % for year x
US GAAP commercial substance
- Commercial substance affects future cash flow
- No commercial substance does not affect future cash flow
Exchanges with commercial substance
- g/l recognized based on old assets carrying value in comparison to old assets fair value
- new assets carrying value=fair value of old assets plus cash received or minus cash paid
Exchanges lacking commercial substance
- All losses recognized
- No gains recognized unless boot is received
exchanges lacking commercial substance and the effect of boot
- If boot is <25% of total consideration then gain is recognized in proportion to boot received.
- If boot is >25% of total consideration then all gain is recognized.
IFRS non monetary exchanges
Either exchanges of similar assets or exchanges of dissimilar assets
IFRS similar asset exchange
No revenue generated and no gains recognized
IFRS exchanges of dissimilar assets
generate revenue and are accounted for in the same way GAAP treats exchanges with commercial substance
gain formula for non monetary transaction with commercial substance
gain=fair value of asset given-BV of asset given
Value of partnership contributions
Fair value less PV of L assumed by partnership
3 methods to account for admission of new partners
(new partners investment/new partners %)-actual capital contributed by all
How are current costs of inventory and PP&E measured?
current cost or lower recoverable amount at measurement date.
Where are foreign currency remeasurement gains and losses reported?
Where are foreign currency translation gains and losses recorded?
Balance sheet (PUFE) Disclosed and accumulated in other comprehensive income
What is a subsidiaries functional currency?
The currency in the envirnment in which the subsidiary primarily generates and expends cash
How are gains and losses resulting from foreign transactions treated?
As an extension of the domestic operations as a component of income from continuing operations in ther period in which they occur
Two exceptions to including balance sheet accounts at the current exchange rate
- 1. Self contained subsidiary with cumulative 3 year inflation rate of 100% or more (hyperinflation)
- 2. A foreign entity that does not maintain its accounts in a foreign functional currency
Exchange rate in effect at the balance sheet date.
How are income items treated under translation method?
translated using weighted average exchange rate for the current year.
- Other Comprehensive Basis Of Accounting
- Presentations include financial statements prepared using cash basis, modified cash basis, and income tax basis
Estimated income tax on a personal statement of financial condition
=difference between fair values and tax bases of assets and liabilities
How are items reported on a personal financial statement?
Fair market value
What do personal financial statements consist of?
- A statement of financial condition
- A statement of changes in net worth
How should a business interest that represents a large part of an individuals total assets be presented in a personal statement of financial condition?
A single amount equal to estimated current value of the business interest
Holding gain on inventory under current cost accounting
Excess of replacement cost at balance sheet date over original purchase price.
Where are gains and losses from remeasurement and translation reported?
- Remeasurement=Income from continuing operations
- Translation=Other Comprehensive Income
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