Financial Ii

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Financial II.
1. Event -

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Something that happens to an entity and it can occur either externally or internally.

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Financial II.
2. Transaction -

Back 2

An event that occurs external to the entity and typically involves a transfer of value from one entity to another

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Financial II
Revenue Recognition GAAP -

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(a) persuasive evidence of an arrangement exists.
(b) Delivery has occurred services have been rendered.
(c) The Price is fixed and determinable.
(d) Collection is reasonably assured.

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Financial II
Revenue Recognition IFRS - Sale of Goods

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Sale of Goods-
(1) Revenue and cost incurred for cost can be measured reliably.
(2) THe economic benefits from the transaction will flow to the entity.
(3) the Entity has transferred to the buyer the significant risk and rewards of ownership.
(4) THe entity does not retain managerial involvement to the degree associated with ownership or control over the goods sold

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Financial II
C. Revenue Recognition IFRS - Rendering of services.

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Is recognized using the percentage of completion method when the outcome of the transaction can be estimated reliably.
the stage of completion of the transaction at the end of the reporting period can be measured reliably

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Financial II
C. Revenue Recognition IFRS - Interest, Royalties and Dividends

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Recognized when all of the following conditions have been met:
(1) Revenue can be measured reliably.
(2) Probable economic benefits will flow the entity

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Financial II
C. Revenue Recognition IFRS - Construction Contracts

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Recognized as revenue and expenses using the % of completion method when the outcome of the construction contact can be estimated reliably.

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Financial II
C. Revenue Recognition IFRS - Construction Contracts

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(1) Measured reliably.
(2) Economic Benefits will flow to the entity.
(3) The stage of contract completion at the end of he reporting period can be measured reliably.

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Financial II
C. REVENUE
Multiple Elements Arrangements US GAAP

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When a sales contract includes multiple products or services, the fair value of the contract must be allocated to the separate contract elements, Revenue is then recognized separately for each element based on the revenue recognition criteria appropriate for each element.

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Financial II
C. REVENUE
Exceptions and other Special Accounting Treatments

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a. Deferred Credits.
b. Installment Sales
c. Cost Recovery Method
d. Nonmonetary exchanges
e. Involuntary Conversions.
f. Net Method of accounting for trade (sales) Discounts.
g. Percentage-of-completion Contract Accounting

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Financial II
D. EXPENSES

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Reduction of assets or increase of liabilities (or both) during a period of time. Expenses should be recognized according to the matching principle

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Financial II
E. REALIZATION

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Realization occurs when the entity obtains cash or the right to receive or has converted a non cash resource into cash

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Financial II
F. RECOGNITION

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Is the actual recording of transactions and events in the financial statements

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Financial II
G. Matching principle

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Expense must be recognized in the same period in which the related revenue is recognized . Matching of revenues and costs is the simultaneous or combined recognition of the revenues and expenses that results directly and jointly from the same transactions or events

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Financial II
H. Accrual Accounting (Income statement impact - No cash impact)

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Accrual accounting is required by GAAP ad is the process of employing the revenue recognition rule an he matching principle to the recognition of revenues and expenses.

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Financial II
I. Deferral (No Current Income Statement impact / Balance Sheet Impact

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Deferral of revenues or expenses will occur when cash is received or expended but is not recognizable for financial statement purposes.

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Financial II
J. Accrued Assets and Liabilities
1. Accrued Assets

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The recognition of an accrued asset represents revenue recognized or earned through the passage of time but not yet paid to the entity.

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Financial II
J. Accrued assets and Liabilities
2. Accrued Liabilities

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Accrued Liabilities represent expenses recognized or incurred through the passage of time but not yet paid by the entity.

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Financial II
J. Accrued Assets and Liabilities
3. Estimated Liabilities

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Estimated Liabilities represent the recognition of probable future charges tat result from a prior act.

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Financial II
K. Cost may be applicable to past, present, or future periods.

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1. Expired Costs
2. Unexpired Costs

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Financial II
K. Cost may be applicable to past, present, or future periods.
Expired Costs

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a. Insurance Expense
b. Cost of goods Sold
c. Period Costs are costs expiring in the period incurred

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Financial II
K. Cost may be applicable to past, present, or future periods.
Unexpired Costs

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Should be capitalized and matched against future revenues. If future revenues are not certain or there is no residual value, then those costs should be expenses as expired costs.

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Financial II
L. Prepaid Expenses (current assets)

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1. Residual Value (expenditures with a residual value)
2. Future Right to Services (future right to services)

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Financial II
M. Deferred Charges

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1. Not charges to a tangible Asset
2. Intangible Assets and non current Prepaid Items

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Financial II
M. Deferred Charges
1. Not charges to a tangible Asset

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Deferred charges result from expenditures or accruals that cannot be charged to a tangible asset, but that do pertain to future operations.

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Financial II
M. Deferred charges
2. Intangible Assets and concurrent prepaid Items

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Deferred charges may include intangible assets and non curet prepaid items

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Financial II
II Revenue Recognition

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A. Deferred credits.
B. Royalty Revenue
C. Unearned Revenue
D. Revenue Recognition when the right of return exists.
E. Franchises

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Financial II
II Revenue Recognition
A. Deferred Credits

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1. represent future income contracted for and/or collected in advance (gift certificates, magazine subscriptions, etc)
2. Have not yet been earned by the passage of time or other criteria.
3. Are located in the liability section of the balance sheet.

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Financial II
II Revenue Recognition
B. Royalty Revenue

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Is recognized when earned. normally based on a state % of sales.

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Financial II
II Revenue Recognition
C. Unearned Revenue

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Recorded as a liability because it is an obligation to perform a service in the future and is reported as revenue in the period in which it is earned, that is when no future service is required.

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Financial II
II Revenue Recognition
D. Revenue Recognition when the right of return exists

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The buyer has the right to return the product shall be recognized at the tie of sale only if all required conditions are met.

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Financial II
II Revenue Recognition
D. Revenue Recognition when the right of return exists.
If the following conditions are not met, then the recognition of revenue shall be deferred

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1. Sale price fixed.
2. Buyer assumes all risks of loss
3. buyer has paid some form of consideration.
4. Product sold is substantially complete.
5. Amount of future returns can be reasonably estimated.

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Financial II
II Revenue Recognition
E. Franchises

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Franchise accounting involves two types of fees:

1. Initial Franchise Fees
2. Continuing Franchise Fees

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Financial II
II Revenue Recognition
E. Franchises
1. Initial Franchise Fees

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These fees are paid by the franchisee for receiving initial services from the franchisor such as site selection, supervision of construction, quality control.

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Financial II
II Revenue Recognition
E. Franchises
2. Continuing Franchise Fees

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Received for ongoing services provided by the franchisor to the franchisee. Fees should be reported by the franchisor as revenue when they are earned.

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Financial II
II Revenue Recognition.
E. Franchises
3. Franchisor Accounting (Franchise Fee Revenue)

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a. Unearned Revenue.
b. Earned Revenue
c. Other Recognition Methods.

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Financial II
II Revenue Recognition
E. Franchises
a. Unearned Revenue

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The present value of any contract amounts relating to future services should be recorded as unearned revenue. Unearned revenue is recognized as revenue once SUBSTANTIAL PERFORMANCE ON SUCH FUTURE SERVICES has Occurred

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Financial II
II Revenue Recognition
E. Franchises
b. Earned Revenue

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Should report revenue from initial franchise fees when all material conditions of the sale have been "substantially performed"

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Financial II
II Revenue Recognition
E. Franchises
b. Earned Revenue
Substantial performance

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(1) Franchisor has no obligation to refund any payment (cash or other wise) received.
(2) Initial Services required of the franchisor have been performed.
(3) All other conditions of the sale have been met.

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Financial II
II Revenue Recognition
E. Franchises
c. Other recognition Methods

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(1) Installment or cost recovery percentage methods may be used under certain circumstances.
(2) These method shall be used for earlier recognition of the initial franchise fee revenue only when:
a) Revenue is collectible over an extended period of time.
b) There is no reasonable basis for estimating collectibility.

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Financial II
III Expense Recognition

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1. Classification of Intangible Assets.
2. Capitalization of Cost
3. Amortization
4. Valuation.

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Financial II
III Expense Recognition
A. intangible Assets.

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Long lived legal rights and competitive advantages developed or acquired by a business enterprise.

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Financial II
III Expense Recognition
A. intangible Assets
1. Classification of Intangible Assets

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a. Identifiability
b. Manner of acquisition
c. Expected period of Benefit
d. Separability

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Financial II
III Expense Recognition
A. intangible Assets
a. Identifiability

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(1) Patents, copyrights, franchises, trademarks, and goodwill are the common intangible assets.
(2) Specifically identifiable or not specifically.

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Financial II
III Expense Recognition
A. intangible Assets
b. Manner of acquisition

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(1) Purchased (Recorded at cost)
(2) Internally developed Intangible Assets

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Financial II
III Expense Recognition
A. intangible Assets
b. Manner of acquisition
(2) Internally developed Intangible Assets

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Under U.S. GAAP, the cost of internally intangible assets not acquired from others should be expensed against income when incurred because US GAAP prohibits the capitalization of research & development cost.
Exception is certain cost associated with intangibles that are specifically identifiable can be capitalized such as: Legal fees, registration or consulting fees, design costs, other direct costs.

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Financial II
III Expense Recognition
A. intangible Assets
c. Expected Period of benefit

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Classification of the intangible asset depends upon whether the economic life can be determinable or is indeterminable.

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Financial II
III Expense Recognition
A. intangible Assets
d. Separability

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Depends upon whether the asset can be separated from the entity or is substantially inseparable from it

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Financial II
III Expense Recognition
A. intangible Assets
CAPITALIZATION OF COST

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a. Cost is measured by (1) the amount of cash disbursed or the fair value of other assets distributed. (2) present value of amounts to be paid for liabilities incurred (3) fair value of consideration received for stock issued .
b. Cost may be determined either by the fair value of the consideration given or by the fair value of the property acquired.
c. The cost of unidentifiable intangible assets is measured as the difference between the cost of the group of assets or enterprise acquired less liabilities assumed.
d. The cost of identifiable assets should not include goodwill

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Financial II
III Expense Recognition
A. intangible Assets
AMORTIZATION

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MUST HAVE A DEFINITE LIFE.
Value of intangible assets eventually disappears; therefore, the cost of each type of intangible asset (except for goodwill and assets with indefinite lives) should be amortized by systematic changes to income over period estimated to be benefited.