FAR Chapter 2
Matching(Revenue and Expenses) Foreign Currency Accounting
Terms in this set (102)
Probable future economic benefits obtained or controlled by an entity as a result of past events (Internal or External) or transactions (external).
Probable future economic sacrifice that a company faces to provide services or transfer assets.
The increase of an asset or decrease of liabilities during a period of time. Directly stem from central operations.
Under U.S. GAAP When should Revenue be Recognized?
When it is Realized or Realizable and when it is Earned.
What Four Criteria Should be Met pertaining to a Revenue so that it can be recognized?
1. Evidence of arrangement exists
2. Delivery has occurred or Services have been rendered.
3. Price is fixed and Determinable
4. Collection is Reasonably Assured.
When is Revenue from the sale of a product or disposal of an asset recognized?
On the Date of Sale (the delivery date) or Setting aside of goods ordered. Or Transfer of Legal Title.
When is revenue from allowing the use of the entities assets recognized?
When the assets Are used.
What are some examples of Revenue that stem from allowing others to use the entities Assets?
1. Rental Revenue
3. Interest Revenue
Under IFRS What Criteria Should be Met before Revenue from Sale of a Good can be Recognized?
1. Revenue and Costs should be measured Reliably
2. Economic Benefit will Flow into Entity
3. Entity has transfered significant Risk and Reward of Ownership
4. No longer have managerial involvement over the good.
Under IFRS What Criteria Should be Met before Revenue from Rendering of Services can be Recognized.
1. Revenue and Costs Should be Measured reliably.
2. Economic Benefit flows into Entity
3. Stage of Completion can be measured reliably at the end of the period.
Under IFRS What Criteria Should be Met before Revenue from Interest Royalties and Dividends could be Recognized.
1.Revenue and Costs can be measured reliably
2.Economic Benefit will flow into the entity
Under IFRS What Criteria Should be met before Revenue from Construction Contracts can be Recognized.
1. Revenues and Costs should be measured reliably
2. Economic Benefit will flow into the entity
3. Contract Costs and Stage of Completion at the end of a period can be measured reliably.
If a Construction Contract is expected to have a loss how is the loss recognized?
It is immediately Expensed.
What is Multiple Element Arrangement
When a Sales Contract includes multiple products and services. Revenue is then recognized as each element of the sale meets the revenue recognition criteria.
An account with a credit balance that will be recognized as a revenue. Cash Received in Advance. Unearned Revenue.
The reduction of assets or increases in Liabilities that stem from central operations to generate revenue.
When Should Expenses be recognized?
They should be recognized in accordance to the matching principle. Expenses Should be recorded in the period in which its related revenue is recognized.
When there is not a cause and effect relationship between Expenses and Revenues how should the expense be recognized?
Systematic methods: Depreciation, Amortization of long lived assets. Immediate expensing of period costs.
What is accrual accounting?
Required GAAP method of recording transactions as they occur not as cash is received or expended.
When do you Defer revenue or expenses?
When payment is received and not yet earned (deferred Credit or Unearned Revenue) or expended (Prepaid Expense) and not yet utilized.
When do you Accrue Assets (revenues) and Liabilities (expenses)
When revenue is earned but not yet paid to entity. When Expense is incurred but not yet paid by entity.
Recognition of Probable Future Charges that result from a prior act : Warranties, Coupons
What would be the journal entry for Rendering a Service but not yet receiving payment for the service. What type of recognition is this?
Credit Accrued Revenue
What would be a journal entry for recognizing revenue you have already earned.
Debit Accrued Revenue
What would be a journal entry for receiving a product or service but not yet paying for it.
Debit Accrued Expense
Credit Accounts Payable (accrued liability)
Costs that expire and have no future benefit. They are expensed on the Income Statement.
What are some Examples of Expired Costs
1. Insurance Expense: systematically allocated to a certain period.
2. Cost of good sold: Allocated to periods in which sales take place
3. Period Costs
Cost that are capitalized and matched against future revenues. They remain on the Balance Sheet and don't make it to the IS until
Examples of Unexpired Cost
1. Prepaid Expenses
2. Fixed Assets
Expenditures or Accruals that cannot be charged to a tangible asset but pertain to future operations.
What are some Examples of Deferred Charges?
1. Intangible Assets
2. Non-Current Prepaid Items
Whats a journal entry for revenue received but not yet earned?
Credit Deferred Revenue or Unearned Revenue
Royalty Revenue comes from allowing the use of rights of publication or patent. Based on % of Sale.
Why is Revenue received before it is earned recorded as a liability (unearned revenue).
It is recorded as a Liability because there is still an obligation to perform a service.
What two types of Fees does Franchise Accounting involve?
Initial Franchise Fee: Paid by Franchisee to Franchisor for receiving initial services.
Continuing Franchise Fees: Fees paid based on Franchise Revenues.
How does a Franchisor record the Fees its receives from the Franchisee?
The Initial Franchise Fee is recorded as unearned revenue until the first day of operation.
The continuing Franchise Fees are recorded in the period earned or when all Substantial performance on future services occurred.
Long Lived Legal Rights to provide benefit to the entity.
Under GAAP how is an Internally Developed Intangible Asset Recognized?
It is Expensed. Research and Development is prohibited to be capitalized under GAAP.
What costs relating to what type of Intangible Assets can be Capitalized?
Legal and Registration Costs relating to specifically identifiable IA can be Capitalized: EX Legal fees of successful defense, Registration, Design Costs, Costs to Secure Asset.
What happens to unsuccessful defense of an IA?
They should be expensed and then tested for impairment.
Under IFRS how are Internally Developed IA Recognized?
Research is always expensed.
IA arising from Development is Capitalized if all the criteria are met.
What is the criteria for Capitalizing Development under IFRS
1. Technologically Feasible
2. Intended to be Complete
3. Ability to Use or Sell IA
4. Will Generate Future Benefit
5. Resources are available to complete IA
How is the Cost of Unidentifiable IA measured.
Difference between the Sum of the Group of Assets Acquired and Sum of Identifiable IA - Liabilities assumed.
the lowering of value of intangible Assets over the periods estimated to get benefited.
What method should be used for Amortization.
The Straight line Method. Value of IA/Estimated Useful Life.
How should a Patent be amortized?
Shorter of Estimated life or remaining legal life.
What Classification of IA is Goodwill
It is an Unidentifiable IA because it has an Infinite Life.
When a IA becomes Worthless how is this recognized?
Write down the remaining cost (Expense)
How do you recognize impairment on an IA?
Expense the amount of the loss.
What do you do if the Useful life of an IA changes?
Recalculate Amortization by dividing the Net Book Value by the new remaining useful life.
How do you caculate G/L of an IA when it is sold
Record G/L by Calculating the difference of the carrying value and the selling price.
What is the income Tax Effect of Goodwill
It can cause temporary differences because an Acquired Unidentifiable IA can be deducted over a 15 year period for tax purposes only. Not Acceptable under GAAP.
Under GAAP how are Finite Life IA Reported.
Cost Less Amortization Less Impairment (IFRS Cost Model)
Under GAAP how are Infinite Life IA Valued?
Cost Less Impairment (IFRS Cost Model)
What are the two models under IFRS for Valuation of IA.
The Cost Model: Cost-Amortization-Impairement
The Revaluation Model: Where IA are initially recognized at Cost and reevaluated to FV.
FV-Subsequent Amort (Finite life only) - Impairment
Where are Revaluation Losses Recognized.
Losses from Revaluations are recorded on the IS.
What happens if a revaluation loss reverses a revaluation gain.
Then the loss reduces the revaluation surplus in OCI and the remaining loss is recorded in IS.
Where are Revaluation Gains Recognized?
Gains from Revaluations are recognized in OCI.
What happens if a revaluation gain reverses a Loss.
Then the Loss on the IS is reversed and the remaining gain is recorded in OCI as a revaluation surplus.
What happens if a revalued IA subsequently becomes impaired?
The impairment value will reverse any surplus in OCI and the remaining impairment will be recorded in the IS under Continuing Operations Unless the IA is from a discontinued or Held for sale Segment.
How does a Franchisee record its Initial Franchise Fee?
It is an Intangible Asset therefore it should be capitalized and amortized over expected period of benefit (Expected Life of the Franchise)
How does the Franchisee record Continuing Franchise Fee?
Expense as incurred.
How should Start Up Costs be Recognized.
They should be expensed when incurred.
What do start up costs include?
Opening a new facility
Business in new territory New Market
Initiating new Process
Representation of Intangible resources and elements connected with an entity.
What are the two methods for calculating Good Will.
1. Acquisition Method
2. Equity Method
Using he Acquisition Method How do you calculate goodwill?
Excess of FV of Acquired Entity Over FV of Net assets.
How are costs related to maintaing goodwill treated?
Costs for Maintaining, Developing or Restoring Goodwill are expensed.
When is it appropriate to capitalize R&D Costs under GAAP?
When Costs relate to materials, equipment and facilities used have alternate future uses.
When the final result is being developed on behalf of someone else or for another entity under a contractual agreement.
Under IFRS What are Computer Software Developments Classified as?
Internally Developed Intangibles. Therefore research costs are expensed and Development Costs Could be capitalized if it meets the criteria.
For Comp Software Developed to Be sold leased or licensed until when can costs be expensed?
Until technological feasibility has been established
For Comp Software Developed to be Sold Leased or Licensed How are costs treated between the time Technological Feasibility is established and the Release Date
Costs are Capitalized.
For Comp Software to be sold Leased or Licensed how are the capitalized cost amortized
GREATER of Percentage of revenue (Current Gross Revenue for Period/Total projected gross capital for product) and Straight line method.
How are Comp Software Costs developed for sale treated
Expensed until product is technologically feasible then capitalized and amortized with straight line.
If a Entity decides to sell the Comp software that was intended to be used internally how will it recognize the proceeds received.
It should be applied to carrying cost and the remaining amount can be recognized as revenue.
Intangibles should be reviewed for unrecoverable carrying costs how often. And what is this process called.
Annually. Impairment Test
What are the two steps to test for impairment of a FINITE IA?
1. Compare the Carrying Value to the Undiscounted CF expected to result from he use of asset.
2. If Carrying Value >Expected Cash Flow then it is Impaired. Impairment loss = Carrying Value (Difference) FV
How do you determine if an INFINITE IA is impaired.
If the FV is less than Carrying Value it is impaired. The Impairment loss is the difference.
Where are impairment Losses reported on the IS?
They are reported as a component of Income from Continuing Operations unless the IA is related to discontinued Ops.
Under IFRS how is Impairment of IA Calculated.
IFRS calculates impairment by comparing the carrying value to the recoverable amount (greater of fv-cost to sell or assets value in use)
Whats the first step to calculating goodwill impairment?
Step 1: Check for Impairment by comparing Carrying Value to FV of Assets
What is Step 2 to calculating goodwill impairment?
Compare implied fv of the goodwill with the carrying amount of goodwill.
How is goodwill Immpairment analyzed under U.S. GAAP
Step 1: Identify Impairment by Comparing CV to FV (including goodwill). If CV is GREATER than FV than impairment exists.
Step 2: Measure Goodwill Impairment by Comparing IMPLIED FV of Goodwill to the Goodwills Carrying amount.
What is the Calculation for Impairment Loss under U.S. GAAP and IFRS.
GAAP: CV>FV = Difference = Impairment Loss
IFRS: CV>Recoverable amount = Difference = Impairment Loss
How is Impairment of Long lived Assets ( IA) Calculated Under IFRS.
Difference between the Carrying Value and Recoverable amount (Greater of FV-Cost to sell or Value in Use( PV of Future Cash Flows))
What is the Test of Recoverability (Impairment test) for Long Lived Assets under GAAP?
Finite Lives: Compare the Assets Undiscounted Future Cash Flows to Carrying Value. If CV>that Future Cash Flows then the Asset is Impaired.
Indefinite Life Assets: FV<CV= Impairment
How are Gains and Losses On Nonmonetary exchanges recognized Under GAAP?
With Commercial Substance: Recognize Gain or Loss equal to the difference between the FV of what is GIVEN UP and the CV of what is GIVEN UP
Without Commercial Substance: If the FV of the New Asset or Asset Given up is Unknown NO GAIN Recognized UNLESS a boot is received. Losss are recognized in Full.
If a boot received is greater than 25% of total exchange ALL GAINS and LOSSES are recognized just like if it did have commercial substance.
When will an asset exchange have commercial substance?
When an entity expects a change in future cash flows as a result of the exchange.
How are Gains and Losses on Nonmonetary exchanges recognized under IFRS?
Exchange on similar assets: No gains are recognized. Losses recognized in FULL.
Exchange on Dissimilar assets: ALL Gains and Losses Recognized
When are profits recognized under the cost recovery method?
After all costs have been recovered.
How do you calculate the Gross Profit realized on the Installment Sales.
Cash received * Total Gross Profit/Sales Price
What is the Percentage of Completion Formula.
Total Cost To Date/Total Est. Cost of Contract (Percentage Complete ratio) * Total Est. Gross Profit (Contract Price-Cost to date-future estimated cost) - Gross Profit recognized to date.
When are losses recognized for long-term construction type contracts?
Immediately when discovered. Regardless of method used.
What are two methods of revenue recognition for Long-term contruction-type contracts under U.S. GAAP and IFRS.
1. Percentage of Completion
2. Completed Contract
1. Percentage of completion
2. Cost Recovery
When is the remeasurement method Used pertaining to Foreign Currency?
The Remeasuremnt method is used to restate FS from the foreign currency to the entitys functional currency When:
1.The reporting Currency is the Fuctional Currency (Meaning FS should are being reported in another currency.
2. The FS must be restated in the functional Currency before translating from functional currency to reporting currency.
When is the translation method used?
To restate financial statements denominated in Functional currency to the reporting Currency
What makes an entities currency functional Currency
It is the currency of the primary economic environment in which the entity operates.
1. Foreign Operations are relatively self contained and integrated within the country
2. Day to Day operation do not depend on the parents or investors functional currency
3. The local economy of the foreign entity is not highly inflationary.
What are the two foreign Currency Activities?
1. Foreign currency translations
2. Foreign Currency transactions
What are considered Non-Monetary Items?
Assets and Liabilities that Fluctuate in value with inflation and deflation. (Items need to be restated to constant dollars)
-Property, Plant and epuipment
What are Monetary Items?
Assets and Liabilities that are fixed in amount by contract or in terms of numbers of dollars
They are stated in constant dollars.
Under GAAP: In a non monetary exchange what is the basis of the new asset.
With Commercial Subtance: or 25% boot...: Record Fairvalue of asset given up + cash paid (- Cash Received) or the FV of Asset received if it is more evident.
No commercial Substance: Record at the net book value of the asset given up + cash paid ( or - Cash received). Unless adjustments are needed for gain recognized (if boot is recieved.).
What exchange rate should be used for the different components fo the financial statements
Assets and Liabilities: Current Exchange Rate
Common Stock and APIC: Historical Rate
Revenue and Expenses: Weighted Average exchange rate for the period
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