FAR 2-1: Timing Issues

Question 1

In general, what are the criteria for revenue recognition under U.S. GAAP?

Answer 1

Earned & realized or realizable. The following 4 criteria must be met before revenue can be recognized:

1. Persuasive evidence of an arrangement exists
2. Delivery has occurred or services have been rendered
3. The price is fixed & determinable
4. Collection is reasonably assured

Question 2

What are the 4 categories of revenue transactions under IFRS & what are the common revenue recognition criteria for those categories?

Answer 2

1. Sales of goods
2. Rendering of services
3. Revenue from interest, royalties, & dividends
4. Construction contracts

Common revenue recognition criteria include:

• Revenues & costs can be reliably measured
• It is probable that economic benefits will flow to the entity

Each category has additional criteria

Question 3

When should revenue from the performance of services be recognized under U.S. GAAP & IFRS?

Answer 3

• U.S. GAAP: In the period in which the services have been rendered & are able to be billed
• IFRS: Using the percentage of completion method when the outcome of the transaction can be estimated

Question 4

What are the conditions for revenue recognition when the right of return exists?

Answer 4

• The sales price is substantially fixed at the time of sale
• The buyer assumes all risks of loss because the goods are considered in the buyer’s possession
• The buyer has paid some form of consideration
• The product sold is substantially complete
• The amount of future returns can be reasonably estimated

Question 5

Name an example of both 1) accelerated & 2) deferred revenue recognition relative to normal recognition when revenue is recognized at the time goods are transferred

Answer 5

• The percentage-of-completion method of long-term construction accounting is an example of accelerated revenue recognition
• The installment method (or cost recovery method) is an example of deferred revenue recognition

Question 6

How are purchased intangible assets & internally developed intangible assets recorded under U.S. GAAP & IFRS?

Answer 6

Purchased intangible assets:
*Recorded at cost, including legal & registration fees, under U.S. GAAP & IFRS

Internally developed intangible assets:

• Legal fees, costs of successful defense, registration fees, consulting fees, & design fees can be capitalized under U.S. GAAP & IFRS
• Under U.S. GAAP, R&D costs must be expensed. Under IFRS, research costs must be expensed, but development costs may be capitalized if they meet certain criteria

Question 7

How are intangible assets reported under U.S. GAAP & IFRS?

Answer 7

• U.S. GAAP: Reported at cost less amortization (finite life intangibles only) & impairment
• IFRS: Reported using the cost mode (same as U.S. GAAP) or the revaluation model. Under the revaluation model, reported fair value on revaluation date less subsequent amortization & impairment

Question 8

How should the contractual amounts of future services to be performed under a franchise agreement be accounted for by 1) the franchisor & 2) the franchisee?

Answer 8

They should be recorded at their present value as unearned by the franchisor until earned & as an intangible asset by the franchisee

Question 9

Define start-up costs

What is the accounting treatment of start-up costs?

Answer 9

• Costs incurred for 1-time activities to start a new operation. Start-up costs include costs incurred in the formation of a corporation
• Start-up costs are expensed in the period incurred

Question 10

Define goodwill

Answer 10

• Excess of the fair value of a subsidiary over the fair value of the subsidiary’s net assets
• Costs of maintaining and/or developing goodwill CANNOT be capitalized

Question 11

What is the maximum period of time over which an identifiable intangible asset (not goodwill) should be amortized?

Answer 11

• The shorter of its estimated useful economic life & its legal life (as in a copyright, franchise, or patent)
• Goodwill is not amortized, but must be tested at least annually for impairment

Question 12

What is the proper treatment of R&D costs under U.S. GAAP & IFRS?

Answer 12

• U.S. GAAP: R&D costs should be expensed as incurred unless an expenditure is for capital assets that have alternative future uses, or for R&D undertaken on behalf of others under a contractual arrangement
• IFRS: Research costs must be expensed. Development costs may be capitalized if they meet certain criteria

Question 13

List some items NOT considered R&D costs

Answer 13

• Routine periodic design changes
• Marketing research
• Quality control testing
• Reformulation of a chemical compound

Question 14

When should the costs of developing computer software for resale, lease or licensing be capitalized under U.S. GAAP?

Answer 14

After technological feasibility has been established & before the product is released for sale

Question 15

How should the costs of capitalized computer software developed for resale be amortized under U.S. GAAP?

Answer 15

Annual amortization is the greater of:

• Percent of revenue method: Total capitalized amount X (current gross revenue for the period/total projected gross revenue for product)
• Straight-line: Total capitalized amount X (1/estimate of economic life)

Question 16

Outline the treatment of computer software developed internally or obtained for internal use only under U.S. GAAP?

Answer 16

• Expense costs incurred in the preliminary project state & costs incurred in training & maintenance
• Capitalize costs incurred after preliminary project state & for upgrades & enhancements
• Capitalized costs should be amortized on a straight-line basis

Question 17

What is the test of recoverability for the impairment of long-lived assets other than goodwill under U.S. GAAP?

Answer 17

• Finite life: If undiscounted future cash flows expected from use of asset & eventual disposal is less than the carrying value, recognized loss on impairment
• Indefinite life: If fair value is less than carrying value, recognize loss on impairment

Question 18

How is impairment of long-lived assets other than goodwill analyzed under IFRS?

Answer 18

• Compare the carrying value of the asset to the asset’s recoverable amount
• The recoverable amount is the greater of the asset’s fair value less costs to sell & the assets value in use (PV of future cash flows)

Question 19

What is the calculation for impairment loss under U.S. GAAP & IFRS?

Answer 19

• U.S. GAAP: The amount by which the carrying amount exceeds the fair value of the asset
• IFRS: The amount by which the carrying amount exceeds the asset’s recoverable amount

Question 20

How is goodwill impairment analyzed under U.S. GAAP?

Answer 20

Goodwill impairment is analyzed at the reporting unit level using a 2-step process:

1. Identify potential impairment by comparing the fair value of each reporting unit with its carrying value, including goodwill
2. Measure the amount of good will impairment by comparing the implied fair value at the reporting unit’s goodwill to its carrying amount

Question 21

How is goodwill impairment analyzed under IFRS?

Answer 21

• Goodwill impairment testing is done at the cash generating unit (CGU) level using a 1-step test that compares the carrying value of the CGU to the CGU’s recoverable amount
• Impairment losses are first allocated to goodwill & then allocated on a pro rata basis to the other CGU assets