FAR 2 Notes Timing Issues - Revenue should be recognized when it is earned and realized/realizable.

To be recognized, a signed contract/arrangement must exist, risks/rewards must be transferred, price is fixed & determinable (no price contingencies), and there are standard collection terms/collection is reasonably assured. - Revenue should be recognized on the date of sale, or if revenue stems from allowing others to use entity assets, revenue is recognized as time passes. Services should be recognized once rendered/able to be billed. - Deferred Credits/Revenue exists when cash is received in advance. Income is recognized as time passes. Until recognized, they are considered a liability. Expenses: should be recognized according to the matching principle (should be recognized in the same period that the related revenue is recognized). - To employ the matching principle, entities must accrue for transactions/events on the I/S - If cash has been received in advance, entities must defer the transaction/events on the B/S Realization: when an entity really obtains cash or right to receive cash Recognition: the recording of a transaction/event in the financial statements Expired Costs Prepaid Expenses: costs that expire during the period and have NO future benefit (i.e. insurance expense, COGS, period costs) Unexpired Costs  Deferred Charges: capitalized and matched against future revenues - Royalty Income: recognized when earned. When royalty cash has been received in advance, it should be deferred on the B/S (booked to the I/S once earned). - Revenue recorded in advance is always recorded as a liability, because you must earn it or return the money If the buyer has the right to return the product, revenue can be recognized as long as all the following conditions are met: sales price is fixed, buyer has assumed all risk of loss, buyer has paid consideration, and the amount of future returns can be reasonably estimated. Franchises: 1. Initial Franchise Fees: fees paid by the franchisee for services to be performed by the franchisor. a. Revenue can be recognized by franchisor once services have been substantially performed. b. The present value of the amount paid should be recorded as an intangible asset by the franchisee and amortized over the expected life of the franchise. i. If present value of payments is < initial stated fee, the PV becomes the Franchise (asset), and the difference is discount on

Page 1 of 7

except for the following exceptions: 1. costs to maintain GW are expensed Research & Development Costs: Generally expensed. registration/consulting fees. Start-Up Costs: all start-up costs. should be expensed Goodwill: excess of costs paid for FV of net assets obtained. recalculate amortization going forward. The discount should be booked to interest expense. or FV of consideration received for issuing stock  How to determine non-identifiable intangibles: the residual dollars resulting from cost of group of assets acquired less costs assigned to identifiable assets net of liabilities o Goodwill is not amortized. it is impaired and should be tested annually . initial required services have been performed. R&D costs undertaken on behalf of others under contractual arrangement Page 2 of 7 . trademarks. other direct costs to secure the asset o Cost should be measured by cash paid/FMV of assets given up. and the do not have indefinite lives)  Patents: life is the lesser of remaining legal life and estimated life . PP&E that have alternate future uses (depreciated over useful lives) a. 2. BOTH the asset and the discount should be amortized over the life of the asset. including organizational costs. Intangibles: may be either specifically identifiable (i. Continuing Franchise Fees: revenue to the franchisor as the fees have been earned.Internally-Developed intangible assets: expensed (i.e. goodwill) o EXCEPTION: capitalize costs if related to – legal fees incurred in the successful defense of the asset or to obtain the asset.General Rules: if intangible becomes worthless. all of the following must be met: franchisor has no obligation to refund payment.e. If the life of an existing intangible is impacted. Impairments are expensed. b. a. patents) or not identifiable (i. Depreciation expense is considered part of the R&D costs 2.notes payable. goodwill). and all other conditions of the sale have been met (typically all of these are met on the first day of the franchise’s operations). calculate gain/loss. PV of liabilities assumed. All of these fees must be recorded as unearned revenue (liability) by the franchisor until the services are performed. If an intangible is sold. design costs.e. expense any additional costs. .Purchased intangible assets: recorded at cost (if in an “arms-length” transaction) o Amortized straight-line over the life of the asset (for intangibles that are not goodwill. For “Substantial Performance” to be met. The franchisee should expense these fees as incurred.

Capitalized costs should only be amortized using straight-line method a. but “technological feasibility” wording is not used (instead. or slated for disposal. and restoration is permitted. Indefinite: Compare FV of asset to BV of asset If an impairment has been identified. reformulation of a chemical compound Computer Software Development Costs: 1. You should identify potential impairment by comparing FV of each reporting unit with their carrying values (including goodwill). must be tested for impairment. Testing process depends on if the asset has finite or indefinite lives: 1. Technological feasibility: a detailed program design or completion of working model b. when writing down: don’t forget the accumulated depr. and then begin amortizing. Though undiscounted future cash flows is used for determining impairment. Capitalized costs are recorded at lower of cost or market 2. impairment exists 2. quality control testing. a. proceeds must be first applied to carrying amount of software. impact Goodwill Impairment Test: is determined on the reporting unit level (meaning separate cash flows. a. % of Revenue: Capitalized amount x (Gross Rev/Period)/(Total projected gross revenue for product) ii. For both methods. If you then decide to sell to outsiders. write down goodwill by the difference of the entity’s FV > specifically assignable fair values and the current book Page 3 of 7 . then capitalize WITHOUT amortizing until product is released for sale.To calculate the amount of impairment. To be used internally: same as software for sale. called “preliminary project state). Write asset down. depreciate new cost. Assets Held for Use: Write asset down.3. restoration not permitted 2. If undiscounted future cash flows > Book value. Amortization is the GREATER of: % of Revenue method or StraightLine method i. Assets Held for Disposal: In impairment loss should be cost of disposal. Finite: Future cash flows and disposition costs must be estimated (NOT discounted!!!) a. . Impairment Testing: long-lived assets to be held and used. discounted future cash flows SHOULD be used for determining the amount of impairment: 1. then the procedure varies based on the purpose of the asset. To be sold/leased/licensed: expense costs incurred up until technological feasibility. NOT considered R&D: design changes in manufacturing. no depreciation taken. and management regularly reviews it). Other impairments should be evaluated BEFORE goodwill. and THEN recognized as revenue (costrecovery method). marketing research.

Current Liability  billed more (deposits. Applicable OH and direct costs are included in the CIP asset v. Completed Contract Method: recognizes income ONLY on completion (or substantial completion) of contract. a. i. At the time of sale. Revenue is recognized when cash is actually received. Percentage of Completion Method: used when collection is assured. retainers) than incurred iv. due on A/R. .value of GW. Formula: % of Completion = Costs Incurred/Total Expected Costs (based on most recent cost information). Good because it is consistent with accrual method Accounting for Installment Sales = Cash method. a. A provision for loss on the ENTIRE contract should be made as soon as a loss is apparent. large number of contracts in progress. Wording: “Costs (billings) of uncompleted contracts in excess of related billings (costs)” ii. Initial impairment test indicator is NOT relevant in determining the actual amount of goodwill. Impairment Loss = component of income from continuing operations (IDEA).Earned Revenue = Cash Collections x Gross Profit % (Gross Profit/Sales Price) o Moves deferred gross profit from B/S to earned gross profit on I/S . Can only use this method when: it is difficult to estimate in-progress costs. Long-Term Construction Contracts: 1.Like Installment sales. Excess of accumulated costs incurred over progress billings is reflected in the B/S as a current asset (vice versa creates a current liability). iii. Always recognize losses immediately as discovered 2.Deferred Revenue (contra asset) = Installment Receivable x Gross Profit % (Deferred Gross Profit is recorded when the receivable is initially recorded) Cost Recovery Method: no profit is recognized on a sale until all costs have been recovered. Current Asset  done more work than billed. i. the expected profit on the sale is recognized as deferred gross profit (same as above). b. can only be used when receivables are collected over an extended period and there is no reasonable basis for estimating collectability. collections are not assured. and the accounting system can easily estimate profitability and provide a reliable measure of progress. . can only be used when there is no reasonable basis for estimating the degree of collectability. Page 4 of 7 .

3 Methods: 1. Determine the exact amount a new partner must contribute to get his capital account to the exact proportional interest to the new net assets of the partnership (old partners’ accounts stay the same) 2. a. ALWAYS recognize losses. or boot is paid  no gain recognized b. recognize ALL of the gain ii. The gain/loss is considered the FV over/under the book value given up 2. If boot >= 25% of total consideration received. Exact Method (Equal to Book Value) – no goodwill or bonuses recorded a. Goodwill Method: recognized based upon total value of the partnership implied by new contribution a. timing. If no boot is received. The change can be in either the risk. or to the old partners (if new partner pays more than BV of capital account purchased) a. BV determines gain/loss! Method depends on exchanges with or without commercial substance: 1.Contributions to the partnership – assets are recorded at fair value.) ii. a proportion of the total gain realized is recognized 1. If boot < 25% of total consideration received. If boot is received: i. or amount of cash flows. and compare that to total net worth (aka “Capitalized Net Assets”). Admission of a Partner . The Page 5 of 7 . Bonus is prorated based on partners’ share of profits and losses (if new partner gets bonus. NOT Having Commercial Substance: ONLY recognize gains if BOOT IS RECEIVED. must also write off the asset at historical cost AND all associated depr. a. New asset cost is = the FV of all assets given up (if an asset is given up.Accounting for Non-Monetary Exchanges: FV vs. Involuntary Conversions: recognize entire gains and losses Partnerships: purchase or sale of an existing partnership interest directly between the partners does not result in a journal entry. liabilities are recorded at their present value. Having Commercial Substance: future cash flows change as a result of the transaction. . old partners’ capital accounts are reduced ratably by bonus as well) 3. Proportion = Total Boot Received / Total Consideration Received 3. Gain/Loss Recognized! i. Compute “Net assets before GW” after admitting new partner. Bonus Method: bonus goes to either the new partner (if new partner pays less than BV of capital account purchased).

Goodwill Method: record implied goodwill based on payment to withdrawing partner. and then subtract total actual capital accounts Withdrawal of a Partner – 2 Methods: (1st.) o Monetary assets lose purchasing power during inflation. Non-Monetary assets/liabilities are fluctuating with inflation and deflation.e. If the deficiency still exists. Bonus Method: difference b/t the withdrawing partner’s capital account and what he’s paid. Distributions: pay out all established distributions. the implied value is the $XX times 4 (to get to 100%).Capital deficiency: a debit balance in a partner’s capital account. if the partnership owes the partner on the loan. o When determining if something is monetary/non-monetary.Monetary assets/liabilites are fixed (cannot be changed). Noncash assets must be converted to cash assets until all liabilities are paid. liabilities gain power Foreign Currency Accounting: SFAS 52 .Difference between nominal dollars and constant dollars = inflation o The GAAP method is Historic Cost/Nominal Dollars: NO adjustment for inflation or appreciation . Financial Reporting and Changing Prices – means “price level” .e. The bonus is allocated ratably among the remaining partners’ capital accounts. The amount of implied goodwill is allocated to ALL partners ratably Liquidation of a Partnership: Creditors (including partners who are creditors) are paid first. and the conversion could result in gains/losses on realization. always revalue the assets to fair value) 1. and the remaining income in the p’ship is distributed to the partners based on their P/L ratios. year-end rate Forward Exchange Rate = the rate you bet on for exchanging currencies in the future Historical Exchange Rate = the rate in effect at the date of purchase (issuance of stock/purchase of asset) Page 6 of 7 . they can legally offset that liability to satisfy the deficiency. If the new partner pays $XX for 25% interest. Current Exchange Rate = “spot rate”. The indirect method is the vice versa (how much 1 US$ is in euros). i. In this case. the domestic price of one unit of foreign currency (i. and the partner’s capital accounts are paid second.difference is Goodwill and is allocated to the old partners proportionately. how much a euro costs in US$). accumulated depr. and could result in a capital deficiency . AFDA.Difference between historic cost and current cost = appreciation of currency . any contra-accounts are always treated the same as their related accounts (i. 2. the remaining partners must absorb the loss based on their P/L ratios.fx Rate: if direct method.

Deferred Crediteentity assets.e. Functional currency is the currency of the primary economic environment in which the entity operates Foreign Currency Remeasurement (aka Temporal Method): must be done prior to translation. amortization on bonds/intangibles) o Plug “Currency Gain/Loss” to get NI from continuing operations to agree to the B/S! Foreign Currency Translation: restating the financial statements from the functional currency into U. is considered part of PUFE (OCI) Foreign Currency Transactions: a gain/loss will result if the FX rate changes b/t time of purchase and time of payment. the gain/loss must be computed in current net income. takes into account fx rate fluctuations during the period . COGS. $.Reporting currency is ALWAYS U. transfer NI to retained earnings o Assets/Liabilities = current rate (“spot rate”) o Common Stock/APIC = Historical Rate o Retained Earnings is Rolled Forward! o Plug the remaining difference into Accumulated Translation Adjustment (equity).Income Statement and THEN Balance Sheet o Income Statement = uses weighted-avg rate. revenue s/Revenue: exists Page 7 of 7 . Non-Monetary  Historical Rate o Income Statement = Weighted Avg.Balance Sheet and THEN Income Statement o Balance Sheet = Monetary  Spot Rate.Weighted Average Rate = used for the I/S.S. $. or where the functional currency is not used .S. for all accounts EXCEPT balance sheet expenses (i.Must be performed in economies w/ hyperinflation. If transaction is not settled at the balance sheet date. depreciation. . . the financial statements must be remeasured from a foreign currency into the domestic currency.

Sign up to vote on this title
UsefulNot useful