CH2
Revaluation Carrying Value
fair value of intangible asset - subsequent amortization - subsequent impairment
Balance Sheet Presentation
i. "Progress billing" and "Construction-in-progress" are different accounts representing the same contract asset and should be shown net of their related contra accounts. Current Asset Accounts Due on accounts(receivable) Costs and estimated earnings of uncompleted contracts in excess of progress of billings(sometimes called "construction in progress") Curent Liability Account Progress billings in excess of cost and estimated earnings on uncompleted contracts.
Advantages/Disadvantages
i. The principal disadvantage of the percentage of the completion method is the necessity of relying on estimates of the ultimate costs. ii. The principal advantages of the percentage of completion method are the accurate reporting on the status of uncompleted contracts and the periodic recognition of income currently(rather than irregularly) as contracts are completed.
Impairment
if revalued intangible assets become impaired the first thing to do is to reduce the revaluation surplus in equity to 0 with further impairment losses reported on the income statement.
Computer Software Developed Internally or Obtained for Internal Use Only
1. Expense costs incurred for the preliminary project state and costs incurred for training and maintenance 2. Capitalize costs incurred after the preliminary project state and for upgrades and enhancements: 3. Direct costs of materials and services 4. Costs of employees directly associated with the project Interest costs incurred for the project
Accounting For Research and Development Costs
1. Expense costs(planning, design, coding, and testing) incurred until technological feasibility has been established for this product. 2. Capitalize costs(coding, testing, and producing product masters) incurred after technological feasibility has been established up to the point that the product is released for sale. 3. Amortization of capitalized software costs annual amortization is the greater of
Examples of Computer Software Development Costs
1. IFRS does not provide separate guidance regarding computer software development. 2. Under IFRS, computer software development costs are internally generated intangibles. Research costs must be expensed whereas development costs may be capitalized if certain criteria are met. Computer software to be sold, leased or licensed.
How do you impair intangible assets other than Goodwill??
1. The impairment test applied to an intangible asset other than goodwill is determined by the asset's life. 2. An intangible asset has a finite life when it is possible to determine the useful life of an asset. 3. When it is not possible to determine the useful life of an asset; the asset has an indefinite(not infinite) life. Intangible asset that has a finite life is amortized over that life; if it does not have an indefinite life it is not amortized. (two step impairment test) Step 1: The carrying amount of the asset is compared to the sum of the undiscounted cash flows expected to result from the use of the asset and its eventual disposition. Step 2: When the carrying amount exceeds the total undiscounted future cash flows, then the asset is impaired and an impairment loss equal to the difference between the carrying amount of the asset and its fair value recorded.
Advantages/Disadvantages
1. the primary advantage of the completed contract method is that it is based on final results rather than on estimates 2. the primary disadvantage is that it does not properly reflect the matching principle when the period of the contract extends over more than one accounting period. ******U.S GAAP vs IFRS Under IFRS the completed contract method is not allowed. Percentage of completion must be used unless the final outcome of the project cannot be reliably estimated; in which case the cost recovery method is used.
What is the acquisition method of goodwiil?
Acquisition Method Under the acquisition method, goodwill is the excess of an entity's fair value over the fair value of the entity's net assets, including identifiable intangible assets.
For income tax purposes, how much can be deducted?
A business may elect to deduct 5,000 each of organizational and start-up costs ii. Each 5,000 is reduced by the amount by which the organizational expenditures or start-up costs exceed 50,000 respectively. iii. Any excess organizational expenditure or startup cost is amortized over 180 months(beginning with the month in which the active trade or business begins) iv. This may create a temporary difference and interperiod allocation of income taxes is appropriate. vi. Organizational expenses are not capitalized as an intangible asset; rather they are expensed immediately.
Change in Method of Accounting
A change in method of accounting for long-term construction contracts is a change in accounting principle. General rule for presenting changes in accounting principle is that changes are reported retrospectively. Long-term construction contracts generally require no special disclosure because they are the nature of the contractor's business. Unusual extraordinary commitments should be fully disclosed in the financial statements or footnotes thereto.
Forward Exchange Contract
A forward exchange contract is an agreement to exchange at a future specified date and rate a fixed amount of currency of different countries.
Involuntary Conversions
A nonmonetary asset is involuntarily converted(e.g. fire loss, theft or condemnation) to cash, the entire gain or loss is recognized for financial accounting reasons.
Denominated or Fixed in a Currency
A transaction is denominated or fixed in the currency used to negotiate or settle the transaction, either in U.S dollars or a foreign country.
How do you account for research and development costs?
Accounting for Research and Development Costs Under US GAAP, the only acceptable method for accounting for research and development is a direct charge to expense except for: Materials, equipment, or facilities(tangible assets) that have alternate future uses. Capitalize and depreciate the assets over their useful lives(not the life of the research and development project). Research and development costs of any nature undertaken on behalf of others under a contractual arrangement. The purchaser(buying the R&D) will expense as research and development the amount paid; and the provider(performing the R&D for the purchaser) will expense the costs incurred as costs of sale. The conclusion of charging most of the research and development costs to expense under U.S. GAAP is the high degree of uncertainty of any future benefits. Disclosure is required in the financial statements or notes of the amount of research and development charged to expense for the period.
Material and Subcontract Costs
All or a portion of items such as material not used and subcontract costs may be excluded in determining the percentage of completion if it appears the exclusion would produce a more meaningful allocation of periodic income. Losses: a provision for the loss on the entire contract should be made when the current estimates of the total contract costs indicate a loss: i. When a loss is indicated on a total contract that is part of a related group of contracts, the group may be treated as a unit in determining the necessity of providing for losses. ii. Income to be recognized under the percentage of completion method at various stages should not ordinarily be measured by interim billings.
How do you report an impairment loss??
An impairment loss is reported as a component of income from continuing operations before income taxes, unless the impairment loss is related to discontinued operations. The carrying amount of the asset is reduced by the amount of the impairment loss. Restoration of previously recognized impairment losses is prohibited, unless the asset is held for disposal.
Percent-of-completion method(U.S. GAAP and IFRS) REQUIREMENTS
Appropriate to use the percentage of completion method once collection is assured and the entity's accounting system can: reasonably estimate collectibility provide a reliable measure of progress toward completion
Classification: Monetary and Non-monetary
Assets: cash, marketable common stock, bonds-non convertible, accounts/notes receivable(and allowance), inventory, long-term receivables, investment in subsidiary(equity), plant, property, and equipment(and accum. depr.) and intangible assets--patents and trademarks. Liabilities: accounts and notes payable, accrued expenses, bonds/notes payable, deferred charges and credits Equities: preferred stock, common stock, retained earnings, use as a residual.
Steps in Restating Foreign Financial Statements How to prep in accordane with IFRS/GAAP??
Before performing any part of the translation process, it is necessary to ensure that the financial statements are expressed in the foreign currency in accordance with U.S. GAAP or IFRS as appropriate. If necessary, there must be corrections to ensure compliance with GAAP or IFRS.
Balance Sheet Implication
Capitalized software costs are reported at the lower of cost or market, where market is equal to net realizable value.
Long-term Construction Contracts
Completed Contract Method (U.S. GAAP only) The completed contract method recognizes income only on completion(or substantial completion) of the contract. A contract is regarded as substantially complete if the remaining costs are insignificant.
Describe the Cost Method
Cost method= intangible assets are valued at cost pursuant to amortization and impairment.
What is done with the costs of maintaining goodwill?
Costs associated with maintaining, developing or restoring goodwill are not capitalized as goodwill(they are expensed). In addition, goodwill generated internally or not purchased in an arm's length transaction is not capitalized as goodwill.
Inventory Costing
Costs incurred to actually produce the product are product costs charged to inventory.
Current Exchange Rate
Current exchange rate is the exchange rate at the current date; or for immediate delivery of currency, often referred to as the spot rate.
Forward Exchange rate
Forward exchange rate is the exchange rate that exists now for the exchange of two currencies at a very specific date.
What is the accounting framework for nonmonetary assets??
Framework: DR NEW ASSET DR Accumulated Depreciation of asset given up DR Cash Received DR Loss if any CR Old Asset at historical asset Cash given Gain (if any)
Definition of Equity Securities
Equity securities are defined as securities that represent an ownership interest in an enterprise or the right to acquire or dispose of an ownership interest in an enterprise at fixed or determinable prices. Equity securities may be represented by: Ownership shares(common, preferred and other forms of capital stock) Rights to acquire ownership shares(stock warrants, rights, and call options) Rights to dispose of ownership shares(put options) c. Equity Securities do not include: Preferred stock redeemable at the option of the investor or stock that must be redeemed by the user. Treasury stock( the company's own stock repurchased and held) Convertible bonds
Balance Sheet Presentation of Completed Contract Method
Excess of accumulated costs over related billings should be reflected in the balance sheet as a current asset Excess of accumulated billings over related costs are reflected as current liability If there is more than one contract, accumulated costs or liabilities will be presented separately on the balance sheet Balance Sheet: "Costs(billings) of uncompleted contracts in excess of related billings(costs)." "Progress Billings", "construction in progress" are different accounts that represent the same contract asset; should be shown net of the related contra accounts. Current Asset Accounts Due on accounts(receivable) Cost of uncompleted contracts in excess of progress billings(construction in progress) ii) Current liability Account Progress billings on uncompleted contracts in excess of cost.
What's an Exchange Rate??
Exchange rate is the price of one unit of currency expressed in units of another currency; the rate at which two currencies will be exchanged at equal value. The exchange rate may be expressed as: Direct Method The direct method is the domestic price of one unit of currency. For example, one euro costs $1.47. b. Indirect Method i. The indirect method is the foreign price of one unit of the domestic currency. For example, .68 euros buys $1.00.
Start-up Costs
FOR Book purposes: Expenses incurred in the formation of a corporation(legal fees) are considered organizational costs. Start-up costs including organizational costs should be expensed as incurred.
How to account for the Percentage of Completion Method??
Following are important points to remember in accounting for contracts under the percentage of completion of method: Journal entries and interim balance sheet treatment are the same as the completed contract method except: the amount of estimated gross profit earned in each period is recorded by charging the construction in progress account and crediting realized gross profit. Gross profit or loss is recognized in each period by the following steps: 1: Compute gross profit or completed contract 2: Compute % of completion 3: Compute gross profit earned(profit to date) 4: Compute gross profit earned for current year 3. An estimated loss on the total contract is recognized immediately in the year it is discovered. However, any previous gross profit or loss reported in prior years must be adjusted for when calculating the total estimated loss.
Foreign Currency Accounting
Foreign currency accounting is concerned with foreign currency transactions and translations Foreign currency transactions are transactions with a foreign entity( buying from and selling to) to be denominated in(to be settled in) a foreign currency. Foreign currency translation is conversion of financial statements of a foreign entity into financial statements of a domestic currency(the dollar).
Foreign Currency Remeasurement
Foreign currency remeasurement is the restatement of foreign financial statements from the foreign currency to the entity's functional currency in the following situations: the reporting currency is the functional currency the financial statements must be restated in the entity's functional currency prior to translating the financial statements from the functional currency to the reporting currency.
How do you recognize Gains and Losses??
Gains and losses are always recognized in exchanges having commercial substance and are computed as the difference between fair value and book value of the asset given up. Under IFRS, nonmonetary exchanges are characterized as exchanges of similar assets and exchanges of dissimilar assets. Exchanges of dissimilar assets are regarded as exchanges that generate revenue and are accounted for in the same manner as exchanges having commercial substance under US GAAP. Exchanges of similar assets are not regarded as exchanges that generate revenue and no gains are recognized.
Implications of Goodwill Impairment(US GAAP)
Goodwill impairment is determined with a different approach. Goodwill impairment is calculated at a reporting unit level. Impairment exists when the carrying amount of the reporting unit goodwill exceeds its fair value. Definition of Reporting Unit A reporting unit is an operating segment, or one level below an operating segment. The goodwill of one reporting unit may be impaired, while the goodwill for the other may or may not be impaired.
Explain Goodwill
Goodwill is the representation of intangible resources and elements connected with an entity(management or marketing expertise or technical skill and knowledge that cannot be identified or valued separately).
Problem solving formulas
Gross Profit=Sale-Cost of good sold Gross Profit %= Gross Profit/Sales Price Earned Gross Profit=Cash Collections X Gross Profit Percentage Deferred gross profi(Uncollected receivable)t= installment receivable X Gross profit percentage
There are four methods of measuring prices and the effects of price changes
Historic Cost/Nominal Dollars is based on historic prices without restatement for changes in the purchasing price of the dollar. This method is the basis for GAAP used in primary financial statements. Historic Cost/Constant Dollars(HCCD) is based on historic prices adjusted for changes in the general purchasing power of the dollar. This method uses a general price index to adjust historical cost; it retains the historic cost basis. Current Cost/Nominal Dollars(CCND) is based on current cost without restatement for(or recognition of) changes in the general purchasing power of the dollar. Current Cost/Constant Dollars(CCCD) is based on current cost adjusted for changes in the general purchasing power of the dollar. This method may use price indexes or direct pricing to determine current cost and will use a general price index to measure general purchasing power effects.
Lifecycle of Product Production
Idea-->Program design, planning, coding, testing(expensed)-->Technological feasability-->Producing product masters, including coding/testing(capitalize)--->Release Product for Sale(Amortization Expense begins)--> Duplicate packaging-->inventory costs of goods sold
Translation Method(current rate method)
If the financial statements of the foreign subsidiary are in the subsidiary's functional currency, the financial statements are translated to the reporting currency starting with the income statement. Foreign currency= Functional currency Income Statement All income statement items=weighted average rate Transfer net income to retained earnings 2. Balance Sheet Assets=Current/year-end rate Liabilities= Current/year-end rate Common stock/APIC= Historical rate Retained Earning= Roll forward Translated retained earnings is equal to the beginning translated retained earnings plus translated net income for the current period less translated dividends declared for the current period.
Describe Exchanges that lack commercial substance
If the projected cash flows after the exchange do not change significantly, then the exchange lacks commercial substance.
Describe LOSSES
If the transaction lacks commercial substance and a loss is indicated, the loss should be recognized.
Purpose of the Standards and Effect on Cash Flows
Impact of cash flows The Standards of foreign accounting are designed to: Provide information regarding the effects of exchange rate changes on an enterprise's cash flow and equity. Recognize in income from continuing operations the effects(gains or losses) of adjustments for currency exchange rate changes that impact cash flows and exclude from net income those adjustments that do not impact cash flows.
Determination of Revenues Recognized
Income recognized is the percentage of estimated total income either: That incurred costs to date bear to total estimated costs based on the most recent cost information That may be indicated by such other measure of progress toward completion appropriate to the work performed.
Accounting for Installment Sales
Installment method is used when there is not viable method of collectability Revenue is not collected at the time of the sale but when the cash is collected.
Foreign Financial Statement Translation
Introduction Before a parent company can consolidate the financial statements of a foreign subsidiary, the subsidiary's foreign currency financial statements must be restated in the parent company's reporting currency. The method used to restate the foreign subsidiary's financial statements is determined by the functional currency of the foreign subsidiary.
Requirements of the Completed Contact Method
It is difficult to estimate the costs of a contract in progress. There are many contracts in progress so that about an equal number are completed in each year and an unequal recognition of income does not result. The projects are of short duration, and collections are not assured.
How do you utilize intangible assets with indefinite lives(one-step impairment test)
It is generally not possible to estimate total future cash flows expected to result from the use of assets and its disposition. An intangible asset with an indefinite life is tested for impairment by comparing the fair value of the intangible asset to its carrying amount. If the asset's fair value is less than its carrying amount an impairment loss is recognized equal to the difference. Note this qualitative impairment test is not necessary if after assessing the relevant qualitative factors, an entity determines that it is not more likely than not that the fair value of the indefinite life intangible asset is less than its carrying value.
Monetary
Monetary assets or liabilities are fixed or denominated in dollars regardless of changes in specific prices or the general price level(accounts receivable). Holding monetary assets during period of inflation will result in a loss of purchasing power whereas holding monetary liabilities will result in a gain of purchasing power.
Describe GAINS
No boot is received = No Gain If the exchange lacks commercial substance and no boot is received, no gain is recognized. Boot is paid= No Gain 1. If the exchange lacks commercial substance and boot is paid, no gain is recognized. iii. Boot is received= Recognize Proportional Gain(< 25% rule) if the exchange lacks commercial substance and the boot received is less than 25% of the total consideration, a proportional amount the gain is recognized. iv. Boot is 25% or More of Total Consideration when boot received equals or exceeds 25% of the total consideration, both parties consider the transaction a monetary exchange and gains and losses are recognized in their entirety by both parties to the exchange
Cost Recovery Method
No profit is recognized on a sale until all costs have been recovered. At the time of sale, the expected profit on the sale is recorded as deferred gross profit. Cash collections are first applied to recovery of product costs. Collections after all costs recovered are recognized as profit.
Non-monetary
Non-monetary assets assets and liabilities fluctuate in value with inflation and deflation. Holders of nonmonetary items may lose or gain with the rise or the fall of CPI if the nonmonetary item does not rise or fall in proportion to the change in the CPI. The nonmonetary item is affected by the rise or fall of the CPI and increase or decrease in the fair value of the nonmonetary item.
Start-up costs include costs of the one-time activities associated with:
Organizing a new entity(legal fees for preparing a charter, byelaws, issuing original stock certifications, filing fees, partnership agreement). Opening a new facility. Introducing a new product or service Conducting business in a new territory or with a new class of customer Initiating a new process in an existing facility
Percentage Revenue
Percentage Revenue= total capitalized amount x current gross revenue/total projected revenue Straight line= total capitalized cost x (1/estimated economic life)
Translation Gain or Loss(other comprehensive income)
Plug "translation adjustment" to other comprehensive income. The translation adjustment is equal to the difference between the debits and credits in the translated trial balance.
Realized Gains and Losses
Realized gains or losses are recognized when a security is sold and when an available for sale security is deemed to be impaired. All recognized gains and losses are recognized on the income statement.
Purpose of Cash Flows
Reflect in consolidated financial statements the financial results and relationships of the affiliated entities as measured in the currency of the primary economic environment in which each entity operates(called functional currency)
How do you remeasure and translate financial statements??
Remeasurement model(temporal method) If the financial statements of the foreign subsidiary are not in the subsidiary's functional currency, the financial statements are remeasured to the functional currency starting with the balance sheet. Balance Sheet: Monetary items=Current/Year-end rate Non-monetary items=Historical rate iii. Income Statement Non-balance sheet related items=weighted average rate Balance sheet related items = Historical Rate Depreciation/PP&E Cost of goods sold/inventory Amortization/bonds and intangibles iv. Remeasurement Gain or Loss Plug "Currency Gain/Loss" to get net income to the required amount needed to adjust retained earnings in order to make the balance sheet balance.
What is Research and Development?
Research is the planned efforts to discover new information that help to create new product, service, process, or technique or significantly improve the one in current use. Development takes the findings generated by research and formulates a plan to create the desired item or to improve significantly the existing one.
Revaluation Gain
Revaluation gains(fair value at revaluation date>carrying value before revaluation) are reported in other comprehensive income and reported in equity as revaluation surplus unless revaluation gain reverses a previously recognized revaluation loss. Revaluation gains are reported on the income statement to the extent that they reverse a revaluation loss.
Revaluation Losses
Revaluation losses(fair value on revaluation date<carrying value before revaluation) are reported on the income statement unless the revaluation loss replaces the previously recognized revaluation gain. Revaluation loss that reverses a previously recognized revaluation gain will be reported in other comprehensive income and reduces the revaluation surplus in accumulated other comprehensive income.
Which items are not considered Research and Development?
Routine periodic design changes to old products or troubleshooting in production stage(these are manufacturing costs, not research and development expenses) Marketing research Quality control testing-QC Testing Reformulation of a chemical compound ***** Under IFRS, research costs must be expensed, but development costs must be capitalized if certain criteria are met
Start-up costs do not include costs associated with
Routine, ongoing efforts to refine, enrich, or improve the quality of existing products, services, processes or facilities. ii. businesses, mergers, acquisitions iii. ongoing customer acquisition
Tax Treatment of Involuntary Conversions
Rules for involuntary conversions are different for tax purposes Gain recognized for financial purposes in one period and then for tax purposes in another period. A temporary difference does result As a result, interperiod tax allocation will be necessary.
Capitalized costs should be amortized on a straight line basis
Software previously developed for internal use is then sold to outsiders, proceeds received should be applied first to the carrying amount of the software, then recognized as revenue(after the carrying amount of the software has reached zero).
Six Steps to Evaluate Goodwill Impairment
Step 1-- Identify potential impairment by comparing the fair value of each reporting unit with its carrying amount including goodwill. Assign assets acquired and liabilities assumed to the various reporting units. Assign goodwill to the reporting units. Determine the fair values of the reporting units and of the assets and liabilities of those reporting units. If the fair value of a reporting unit is less than its carrying amount, then there is potential for goodwill impairment. the impairment is assumed to be due to the reporting unit's goodwill since any impairment in the other assets of the reporting unit will already be determined and adjusted for. The fair value of of the reporting unit is more than its carrying amount, there is no goodwill impairment. Step 2-- Measure the amount of goodwill impairment loss by comparing the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. i. Allocate the fair value of the reporting unit to all assets and liabilities of the unit. Fair value that cannot be assigned to specific assets and liabilities is the implied goodwill of the reporting unit. ii. Compare the implied fair value of the goodwill to the carrying value of the goodwill. If the implied fair value of the goodwill is less than its carrying amount, recognize an impairment loss. Once the goodwill impairment loss has been fully recognized, it cannot be reversed.
What is technological feasability?
Technological feasability is established upon completion of a. Detailed program design b. Completion of a working model
What is Impairment?
The carrying amount of intangibles(including goodwill) and fixed assets held for use and to be disposed of needs to be reviewed at least annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Comparison of Cost Recovery Method to Other Methods
The cost recovery method is similar to the installment sales method in that it may only be used WHEN receivables are collected over an extended period of time There is no reasonable basis for estimating collectibility. Because no profit is recognized until all costs have been recovered; the cost recovery method is the most conservative method of revenue recognition.
FOR IFRS what factors must be considered in determination of an entity's functional currency:
The currency that influences sales prices for goods and services. Currency of the country whose competitive forces and regulations mainly determine the sales price of its goods and services The currency that mainly influences labor, material, and other costs of providing goods and services. The currency in which funds from financing activities are generated. The currency in which receipts from operating activities are retained Whether the activities of the foreign operation are an extension of the parent's activities or carried out with a significant amount of autonomy. Whether the transactions with the parent are a large or small portion of the foreign entity's activities. Whether cash flows generated by the foreign operation directly affect the cash flow of the parent and are available to be remitted to the parent. Whether operating cash flows generated by foreign operation are sufficient to service existing and normally expected debt or whether the foreign entity will need funds from the parent to service its debt.
What is the equity method?
The equity method involves the purchase of a company's capital stock. Goodwill is the excess of the stock purchase price over the fair value of the net assets acquired.
Accounting for The Completed Contracted Method
The following are important points to remember in accounting for contracts under the completed contract method: -applicable overhead and direct costs should be charged to a construction in progress(CIP) account.(an asset) billings and or cash received should be credited to advances on construction in progress account(liability) At completion of the contract, gross profit or loss is recognized as follows: Contract price-Total costs= Gross profit or loss iv. at the interim balance sheet dates, excess of either the construction in progress account or the advances account over the other is classified as a current asset or a current liability. It is classified as current because of the current operating cycle concept v. Losses should be recognized in full in the year they are discovered. An expected loss on the total contract is determined by: 1. Add estimated costs to complete to the recorded costs to date arrive at total contract costs. 2. Adding to advances any additional revenue expected to arrive at total contract revenue Subtract B from A to arrive at total estimated loss on the contract
Define Functional Currency
The functional currency of a foreign entity determines the conversion methodology to use. The functional currency can be the entity's local currency the currency of the reporting entity or the currency of another country. Under U.S. GAAP, the entity's local currency qualifies as the functional currency if it is the currency of the primary economic environment in which the currency operates, and all of the following exist: 1. The foreign operations are relatively self-contained and integrated within the country. 2. The day-day operations do not depend on the parent's or investor's functional currency. 3. The local economy of the foreign entity is NOT highly inflationary, which is defined as cumulative inflation of 100% over three years.
Historical Exchange Rate
The historical exchange rate is in effect the date of acquisition of stock or acquisition of assets.
Debt Security Classified as Held-to-Maturity transferred to Available-for-sale
The unrealized holding gain or loss at the date of transfer shall be reported in other comprehensive income. The debt security was valued at amortized cost as held-to-maturity security and is being transferred to a category valued at fair value. Unrealized holding gain or loss at the date of transfer is already reported in other comprehensive income. Unrealized holding gain or loss shall be amortized over the remaining life of a security as an adjustment of yield in a manner consistent with the amortization of any premium or discount.
Weighted Average Rate
The weighted average exchange rate is calculated to take into account exchange rate fluctuations during the period. It would be impractical to account for the actual exchange rate in effect for numerous recurring transactions(sales). The average rate when applied to a transaction, normally assumed to occur evenly throughout the period, approximates the effect of separate translations of each item.
How Are Nonmonetary Assets Categorized??
Those that have commercial substance Those without commercial substance An exchange has commercial substance if the future cash flows change as a result of the transaction. The change can be in the areas of risk, timing, or amount of future cash flows. The economic position of the two parties changes because of the exchange, then the exchange has commercial substance. A fair value approach is used.
Trading and Available-for-sale securities
Trading and available for sale securities must be reported at fair value. Fair value is the market price of the security or what a willing buyer and seller would pay and accept to exchange the security. Changes in the fair value of trading and available for sale securities result in unrealized holding gains or losses. Reporting of the gains and losses depends on the classification of the securities. Two general ledger accounts are normally maintained, the presentation on the balance sheet is one net amount. Unrealized Gains and Losses--Trading Securities Unrealized holding gains and losses on trading securities are included in earnings. Unrealized gain or loss on trading securities is shown in the income statement.
Explain and describe the 3 categories of marketable securities that are based on the intent of the organization:
Trading securities are those that are bought and held principally for the purpose of selling them in the near term. 1. Trading securities demonstrate active and frequent buying and selling with the objective of generating profits on short-term differences in prices. Securities classified as trading securities are reported as current assets However they can be reported as noncurrent 2. Available for Sale Securities Available for sale securities are those(debt and equity) not meeting the definitions of the other two classifications. Securities that are available for sale securities are reported as either current assets or noncurrent assets If the security represents cash available for current operations, report the security as a current asset. 3. Held-to-Maturity Securities Investments are held-to-maturity if the corporation has the positive intent and ability to hold these until maturity. If there is an intent to hold the security for an indefinite time period, not till maturity, then the security is available-for-sale. If the security is paid or settled in a way that the holder may not recover all of its investment, then the held-to-maturity classification is not used. Securities that are held-to-maturity are reported as current or noncurrent assets, based on their time to maturity.
Reclassification
Transfers between categories occur only when justified. Any unrealized holding gain or loss on that security is accounted for as follows: From Trading Category The unrealized holding gain or loss at the date of transfer is already recognized in earnings and shall not be reversed. To Trading Category the unrealized holding gain or loss at the date of transfer shall be recognized in earnings immediately.
Financial Reporting and CHanging Prices
Under U.S. GAAP, certain large, publicly traded companies may disclose the effect of changing prices. Simple Definitions Historic Cost= The actual exchange value in the dollars at that time an asset was acquired or a liability was assumed. Current Cost= The cost that would be incurred at the present time, the replacement cost. Use the recoverable amount if lower. Nominal dollars-- Unadjusted for changes in purchasing power. Constant Dollars-- Dollars restated based on calculations of CPI ratios.
Explain Unrealized Gains and Losses---Available for Sale-Securities
Unrealized holding gains and losses on available for sale securities(those classified as current assets) are reported in other comprehensive income. U.S. GAAP vs. IFRS Under IFRS, unrealized gains and losses on available for sale securities are reported in other comprehensive income, except for foreign exchange gains and losses on available-sale-debt securities which are reported directly on the income statement.
How is Revenue Recognized??
b. Revenue Recognition: Revenue must be earned before it is recognized Revenues are generally recognized when: The earnings process is complete or virtually complete An exchange has taken place ii. Percentage of completion method recognizes income as work progresses on the contract. iii. Accounting for long term construction contracts by the percentage of completion method is an exception to the basic realization principle. The exception is based on evidence that the ultimate proceeds are available and the consensus that a better measure of periodic income results(principle of matching revenues and costs).
Describe Revaluation
intangible assets are valued at cost and then revalued to fair value at a subsequent revaluation date.
Initial Franchise Fees
the present value of the amount to be paid by the franchisee is recorded as a intangible asset on the balance sheet and amortized over the time of expected benefit to the franchise.
Continuing franchise fees
these fees are received for ongoing services provided by the franchisor to the franchisee(often referred to franchise royalties). calculated as a percentage of franchise revenues example: management training, promotion, legal assitance fees should be recorded as revenue to the franchisor and an expense to the franchisee in the period incurred.
