F2
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Royalties paid should be reported as expense in the period incurred
Internal development of goodwill.
o Cannot be capitalized
o Goodwill is not amortized but it is subject to an impairment test
R&D expense include
o Costs incurred through contracting with a third party for the R&D work to be
done and the costs of searching for new products or new process alternatives
Costs incurred for maintaining or developing goodwill are expensed
Cost of a trademarks is amortized over its economic life
Once the patent is established, legal costs to successfully defend the patent should be
capitalized and amortized over the lesser of the parent’s useful economic life or its legal
life
Market research – not an R&D cost
From a franchisor’s standpoint, initial franchise fees are not revenue until all material
conditions of the sale have been substantially performed.
Net sales =
o Allowance for sales returns – Net Sales
Organization costs
o Expensed for GAAP financial income (no asset)
o Deducted in later years for tax purposes
US GAAP
o Subsequent reversal of intangible asset impairment is prohibited unless the
intangible asset is HFS
Legal costs associated with obtaining a patent on a new product – capitalized
Unearned franchise fees:
o Cash payment + PV of future payments
Legal fees to obtain the patent are capitalized as an intangible asset
All relevant costs incurred before technological feasibility is established should be
expensed as R&D expenditures.
o After technological feasibility is established, all relevant costs are capital until
product is released for sale
 At that point all relevant costs are included in “inventory” (normal
product costs) and charged to COGS when sold
Patent asset =
o Price of the patent
o The VAT taxes
o The legal costs to register the asset
Expense
o Staff training and admin
o Research expenditures
F2
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IFRS
o Development costs may be capitalized if certain criteria are met
 If the patent has been granted, it is generally appropriate to capitalize the
related design costs
Costs incurred to maintain goodwill – expensed under IFRS & GAAP
Goodwill should be tested for impairment at each cash-generating unit – IFRS
Legal fees – should be capitalized
o Engineering following follow-up
 Which is not classified as R&D
Capitalize – succesfull defense
Expense – unsuccessfull defense
Consolidated NI = same as parent company NI
o When equity method is used
APIC
o Reduced by registration and issuance costs
Consolidated dividends paid = parents dividends paid
o Since dividends paid by sub are 100% eliminated in consolidation
 Dividends paid to the non controlling shareholders would decrease their
noncontrolling interest under the equity method
The purpose of a consolidated group of stock of another member of the consolidated
group is treated as a treasury stock transaction
o This follows the theory of consolidation f/s presenting one economic entity
When company owns less than 50% of the CS of on investee corporation,
o Investment account can be reported under the cost or equity method, depending
on whether significant influence is exercised
o Receivables and payables to the investee
 Reported separately on the b/s
Sales and COGS should be reduced by the intercompany sales
100% of all intercompany balances among members of the consolidated group are
eliminated
o All intercompany billings are eliminated in consolidation
F5
1. Bonds
a. Convertible debt
i. Interest rate on convertible debit generally lower than
noncovertible debt because of the value of the conversion feature
ii. Conversion price generally greater than market value of the cs at
the time of issuance
2. Discount amortization
F2
3.
4.
5.
6.
a. Will increase interest expense for the pd so that interest expense exceeds
the interest payment to bondholders
US GAAP
a. Convertible bonds can be repaid with cash at maturity, like traditional
bonds, or can be converted to stock at the option of the bondholder
b. the issuer does not “repay” the debt with stock
c. no value assigned to conversion feature when bonds are issued
IFRS
a. Bond issue costs
i. Reduce the cash received from the bond issuance
ii. Are deducted from carrying value of the liability
iii. Bond issued at premium
1. Carrying value =
a. Bond liability + net premium
Effective method
a. Interest payable =
i. Face value of the bonds at the beginning of the period X
1. Contractual interest rate
b. Interest expense=
i. Carrying value of the bond at beginning of the period X
1. Effective interest rate
Stock warrants
a. At the time warrants are exercised
i. Total shareholder’s equity is increased (credit) by
1. the cash received upon exercise of the warrants
2. but not by the carrying amount of warrants
a. at date of issuance, PIC stockholder’s equity was
increased (credited) by the amount allocated to
warrants
i. which = carrying amount of warrants
PENSIONS
1. Accumulated benefit obligation (ABO)
a. Use current salary
2. PBO
a. Use future salary
3. PSC
a. Increase in benefits, subsequent plan amendments
b. Increases the PBO in the period of the plan initiation or ammedmend
F2
i. Should be amortized to pension expense over the future service periods of
the affected employees
c. Actuarial g/l
i. Increase/decrease PBO
4. IFRS
a. Defined benefit cost includes
i. Current service cost and past service cost
ii. “net interest on defined benefit liability (asset)”
1. Component of defined benefit liability =
2. Net interest on defined benefit liability (asset)=
a. Net defined benefit liability (asset) X discount rate
b. All g/l referred to as remeasurements of the net defined benefit liability (asset)
i. Remeasurement of the net defined benefit liability (asset) include
1. Actuarial gains and losses
2. Difference b/w actual ROPA &
a. interst income included in the net interest on the defined
benefit liability
ii. ALL Remeasurement of the net defined benefit liability
1. Reported on OCI
2. Not reclassified (amortized on the i/s in subsequent periods)
5. US GAAP
a. Measurement date PA & PL must be same as employer’s b/s
b. Required f/s Defined benefit plan
i. Statement of net assets available for benefits
ii. Statement of changes In net assets available for benefits
iii. Statement of accumulated plan benefits
iv. Statement of changes in accumulated plan benefits
v. Stmt of CF not required
c. Service cost
i. Part of EPBO, PBO arising from employee service this period
d. Interest cost
i. Increasing in the APBO/PBO due to passage of time
1. Beginning APBO/PBO X discount rate
6. Accumulated OCI
a. Remain in AOCI until recognized in net periodic postretirement benfit cost
on the i/s through amortization
i. Post retirement benefit g/l
ii. Prior service costs
iii. Transition net assets or
iv. Periodic postretirement benefit cost
F2
7. Required disclosures
a. Public companies
i. Reconciliations of beginning and ending balances &
ii. Rates and assumptions, including:
1. Assumed health care cost trend rate
2. The effect of the APBO, service cost, and interest cost of a 1%
increase/decrease in health care cost trend rate
8. Liability recognition
a. If at least one met
i. The employer’s obligation to compensate employees for future absences is
attributable to services already rendered by employees
ii. Obligation relates to rights that vest (are not contingent on employee’s
future service) or accumulate (may be forward to one or more accounting
periods after to that in which earned)
iii. Payment of the compensation is probable
iv. The amount can be reasonably estimated
b. Vacation – recognize
c. Sick pay benefits – don’t recognize
9. Components of stockholder’s equity
a. RE for prior pd adj &
b. Accounting principle changes (retrospective) &
c. Items of accumulated OCI
10. Comprehensive allocation
a. AKA B/S approach
i. Required by US GAAP
1. Interperiod tax allocation is applied to all temp differences
2. All A& L recognized on current period
11. IFRS
a. When a DTL arises from a transaction that is recognized in OCI
i. Adjust OCI also
12. Deferred tax items not related to an A or L should be classified based on the expected
reversal date of temporary differences
a. DTA related to caryforwards
b. Organization costs
i. Expensed for GAAP financial income (no A or L) but
1. Completed contract method used for tax
c. % completion used for contracts – GAAP financial income (no A or L)
i. But completed contract method used for tax purposes
13. IFRS
a. DTA & DTL reported as noncurrent on b/s
F2
b. DTA & DTL maybe netted if the entity has a legal enforceable right to offset the
current tax assets against current tax liabilities &
c. DTA & DTL relate to income taxes levied by the same tax authorities
14. PBO
a. Used to measure service cost component of net periodic pension cost
15. Diff in executive and non-executive plans – not req disclosure
16. Report plan asses at FV
17. A & L approach – B/S approach
a. Used to det income tax expense
STOCKHOLDER”S
1. Legal capital (capital stock)
a. Amt of capital that must be retained by corp for the protection of creditors
b. May be
i. Authorized
ii. Authorized and issued
iii. Authorized, issued and outstanding
2. Common shareholders may have preemptive rights to a proportionate share of any
additional cs issued if granted in the articles of incorporation
a. Cs – voting rights
b. Preferred stock – usually no voting rights
i. Cumulative
1. Part of preferred dividend not paid accumulates
2. Must be paid before cs can get dividends
ii. Participating PS
1. Preferred shareholders share (participate) w/ CS in dividends in
excess of specific amt
iii. Callable
1. May be purchased at a specific price
a. At corp’s option
2. Aggregate or p/share amt at which preferred is callable must be
disclosed either on b/s or footnotes
iv. Mandatory redeemable ps (liability)
1. Must be bought back co on the maturity date
2. Classified as liability
3. Cost vs legal (par/stated) method
a. Main diff: timing of recognition of g/l on ts transactions
F2
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b. Both: g/l recorded as a direct adj to shareholder’s equity. Not in det of NI
i. Shares held as TS are not considered shares outstanding
c. Cost method – Required by IFRS
i. Used by entities under US GAAP 95% of time
1. Ts recorded at reacquisition cost
2. A g/l determined when tx reissued or retired
a. Original price and BV of stock don’t matter
3. APIC from TS
a. Credited
i. Gains
b. Debited
i. Losses when ts reissued at prices diff from original
sp
ii. Losses may also decrease RE if APIC from TS
account does not have a balance large enough to
absorb loss
4. NI will never be increased through ts transactions
d. Legal (or Par/Stated Value) Method – prohibited by IFRS
i. Recorded by reducing the amt of par (or stated) value and APIC received
at time of original sale
ii. TS debited for its par(or stated value)
iii. APIC – cs debited reduced
1. For pro rata share of the original issue price attributable to the
reacquired sale
Issuance of stock rights
a. Requies memorandam only
Date of declaration
a. Liability created (dividends payable)
b. RE reduced (debit)
c. Board of directors formally approves a dividend
Cash dividends
a. Paid from RE
i. Authorized, issued and outstanding shares
ii. Not ts (authorized)
Property in kind dividends
a. Use FMV of property
Liquidating dividends
a. Exceed RE
b. Reduce total PIC
IFRS & SEC
F2
a. Public entities must present dividends p/share and in total for each class of shares
in stmt of changes in equity or in notes to f/s
10. Stock issued to employees
a. Noncompensatory stock option/purchase plan
i. US GAAP – MEET ALL to be noncompensatory
1. Substantially all fulltime meeting employee qualify to participate.
Excluded are officers and employees owning a specific amt of the
outstanding stock in the corporation
2. Stock is offered to eligible employees equally, can limit # shares
that can be purchased
3. Reasonable time to exercise right
4. Discount form market price is no greater than a reasonable offer of
stock to shareholders or others
5. NO J/E until stock purchased
6. IFRS
a. Employees stock purchase plans and stock options are
generally considered to be compensatory
b. Compensatory
i. FMV option issued
1. Option price – exercise price
2. FV using economic pricing model
3. Vesting pd
a. Pd over which employee has to perform services in order to
earn the right to exercise the options
b. Compensation recog over service period
4. Compensation costs over period of employment attributable to
option
11. Cost method
a. Sale of ts
i. Affects RE if
1. Shares are sold below cost and the diff exceeds any APIC from TS
ii. Gains on TS credited to APIC – TS
1. Not RE
iii. Only losses in excess of APIC TS are booked to RE
12. 2-for-1 stock split
a. Increases TS
13. Right to buy stock – no consideration give = no entry
14. When a company declares a cash dividend
a. RE is decreased by amount of dividend on date of declaration by board of
directors
F2
15. Appropriation has been achieved,
a. Should be restored to unappropriated RE
16. Stock options outstanding
a. Reduced at exercise date
b. Increased at date of grant
17. NI or RE will never be increased through TS transactions.
a. Corps: Cannot report i/s gains and losses from treasury transactions
18. Date of grant
a. Used to value equity instruments issued for employees services
19. Stock dividend
a. Treated as though occurred beginning of year
b. Retroactively
20. Shares issuable upon exercise of a stock option
a. Not considered contingent
i. Contingent
1. They are issuable for no cash consideration after the occurance
of the specified condition
21. When preferred stock is cumulative,
a. The dividend accumulated during the pd must be subtracted to calc basic eps
22. Stock dividend
a. As if occurred at beginning of year
23. Computing basic eps,
a. Convertible securities are ignored for computed wacs
24. Both extraordinary items & Income before extraordinary items
a. Should show EPS on the I/S (US GAAP)
25. Complex capital structure
a. Basic & diluted EPS must be presented for income from continuing operations
and NI
26. Excess of proceeds over cost ts sold, accounted for using cost method
a. Do not affect RE (considered APIC)
b. Cost method of accounting for TS affects RE only if the shares are sold below
cost and the diff exceeds any PIC from TS
CF F7
1. Us t-bill
a. Considered to be a cash equivalent
b. Same as holding cash
c. Does not change position of entity
d. No reported on stmt of CF
F2
2. Req disclosures “direct method” US GAAP
a. The major classes of gross cash receipts and gross cash payments
b. The amt of income taxes paid
c. A reconciliation of net income to net CF from operations
3. Investing activity
a. Acquisitions and sales of lt asset or investments
i. Purchase of bonds
ii. + Proceeds from sale of equipment
iii. – Purchase of equipment
iv. Making and collecting bonds
v. Cash effects of acquiring and disposing of
1. Investments
2. Pp&E
4. Financing activities
a. Obtaining resources form owners and providing them with a return on, and a
return on their investment
b. Borrowing money (proceeds from sale of TS)
c. Repaying amts borrowed
d. Inc dividends paid not dividends declared
5. Conversion of debt to equity
a. Should be disclosed as supplemental info on stmt of CF
b. CF p/share should not be disclosed
6. Stmt of CF.
a. Provide relevant info about
i. The cash receipts and cash disbursements of an enterprise during a
period
7. Operating
a. + increase in allowance for uncollectible accts
i. Allowance is a contra asset acct like a liability
ii. Should be added to NI to compute operating CF
iii. + Dep expense, not the increase in A/D
8. Improve operating CF/ total debt ratio
a. Classify dividend payouts as CFF (IFRS)
b. Dividends paid can be classified under CFO or CFF under IFRS
9. Decrease in interest payable is subtracted when calculating accrual basis interest
expense
a. Decrease in interest payable implies cash interest payments exceeded accrual
basis interest expense
10. Dividends paid
a. Not included in operating activities
F2
i. Reduce RE
ii. Not NI
iii. Included in CF from Financing activities
11. Amortization of bond discount – Indirect
a. Originally subtracted to get NI in the first place
i. Amortized discount added back to NI for an indirect method statement of
CF
b. Dividend received – operating CF
12. Indirect method
a. Required Supplemental disclosure
i. Cash paid for interest and income taxes
1. Will not include disclosure of capital expenditures and capital
lease payments (financing section)
13. Int received can be classified as CFO or CFI (IFRS)
Governmental accounting
1. Fund accounting
a. enables service and mission driven orgs to easily monitor compliance with
spending purpose, spending limits (budget and financial control) and other fiscal
accountability objectives
i. Financial & Legal restrictions
2. Separate fund f/s
a. Presented for governmental and proprietary funds to report
i. Additional and detailed info about the primary government
3. Relevance
a. Must bear logical relationship with the needs for its purpose
b. Be realiable
c. Harder for governmental entities
4. Funds segregated for purpose of carrying out specific activites and attaining certain
objectives (providing drinking water services to customers)
5. Governmental fund measurement focus =
a. Current financial resources
b. The determination of financial position and changes in financial position (sources,
use, and balances of current financial resources)
c. b/s
i. available resources and current obligations
ii. financial position focus
d. Focus: flow of current financial resources
6. Capital maintenance:
a. Preserving capital or assets
F2
b. Proprietary funds – focus
7. General fund
a. Uses modified accrual basis of accounting
b. Revenues – recog when become available and measurable
8. Compensated absence liability
a. Calc based upon the pay or salary rate in effect at the day of B/S
9. Government wide f/s
a. Presented on the accrual basis of accounting
b. Considers availability
i. Recognition of all revenues net of write offs
10. Restricted
a. Limited by external sources such as creditors (debt covenants), contributors, other
governments, laws
11. Non-refundable fund balances
a. Resources ina form that cannot be spent
i. Inventories or prepaid expenditures or are legally or contractually
required to remain as a whole
12. If expenditures incurred for specific purpose >
a. amounts restricted, commited or assigned to assigned to those purpose
b. =negative unassigned fund balance
c. Shouldnot display restricted, committed or assigned
13. Restricted – debt covenants
14. Permanent fund
a. Legally restricted to the extent income, and not principal may be used
forsupporting the reporting government’s programs for the benefit of the public
15. Derived tax revenue
a. Sales taxes, hotel taxes
16. Imposed non-exchange taxes
a. Property taxes and fines
17. Encumbrance
a. Commitment to purchase
i. Debit: encumbrance
ii. Credit: Reserve for encumbrance
iii. Reduce available appropriations
18. Classification of Governmental Fund Balance
a. Non-spendable Fund Balance
i. Monies have been spent, assets are either maturing (long term investments
and are not available) or expiring (prepaids)
b. Unassigned Fund Balance
i. No constraints as to use
F2
c. Committed
Internal: Highest governing authority establishes limits. Govt sets aside
d. Assigned
i. Internal: Intention without formal comitment
e. Restricted Fund Balance
i. External: Law, grantor or creditor requirements must be satisfied
f.