INTANGIBLES

I. Definition:
1. Identifiable: separable from entity; arises from contractual or other legal
rights
2. Control: entity can: obtain future econ benefits from asset; restrict assess
of others to those benefits
3. Future econ benefits: price entity pays to acquire intangible asset reflects
expectations abt probability that expected future econ benefit will flow to
entity probability recognition criteria
II. Costs to be capitalized:
1. Black list: organization cost&start-up cost; initial operating losses; research
cost*(development:can capitalize); advertising cost; training cost(no control);
relocation&restructuring
*research cost: original
investigation to gain net
knowledge expense
*development cost:
application of research
knowledge to creation of
new things capitalize if

[(1)technical feasibility (2)intention to complete&sell (3)ability to use&sell (4)existence of a mkt (5)availability of resources (6)ability to
measure costs reliably]

2. Grey list (if internally generatedexpense; if acquired separated or as part

of biz combinationcapitalize): goodwill&brands, mastheads&publishing titles;
cust lists
III. Types of intagibles:
Type

Limited-life

Manner acquired
Purchase
Internally
d
created
Capitalize
Expense (except
costs that meet
recognition
criteria)

Amortization

Impairment test

Over useful life

IN MONTHS

Compare
recoverable amt
(higher of: FVLCS
v VIU) v carrying
value
Same^

IndefiniteCapitalize
Expense
Dont amortize
life
1. Marketing-related (trademarks, trade name, internet domain names, noncompetition
agreements, mastheads); capitalize: registration&acquisition costs; no amortization, check
for impairment
2. Customer-related (cust list; order/production backlogs; contractual&noncontractual
cust relationships); capitalize: acquisition cost; amortized to expense over useful life
3. Artistic-related (plays; literary works; musical works; pictures; photographs;
video/audiovisual material); capitalize: acquisition cost; amortized to expense over useful
life
4. Contract-related (franchise&licensing agreements; construction permits; broadcast
rights; service/supply contracts; if indefinite life dont amortize; if limited lifeamortize
to expense over useful life
5. Technology-related (patented tech granted by law enforcement bodies; trade secrets);
capitalize: development costs & acquisition costs, lawsuit cost to extent useful life
of patent; expense: research costs.

6. Goodwill
a. Definition: excess of consideration transferred over net of identifiable asset
(fair value of asset liabilities) at acquisition date
b. Recognition criteria: (1)definition is met (2)recognition criteria satisfied
c. Amortization: NO (indefinite life)
d. Impairment: YES; irreversible; compare recoverable amt v carrying amt of
Cash-generating unit
e. Journal Entries:
Dr Assets acquired [at FV]
Dr Goodwill [(FV of assets liabilities) Cash consideration]
Cr Cash [Cash consideration]
Cr Liabilities acquired

LIABILITIES

I. DEFINITION & RECOGNITION:

LIABILITY
present
obligation; past
event;
settlement of
whichoutflow
of resources
from enterprise

PROVISION
liability of uncertain
timing/amount
IV

Recognized when: (1)enterprise

has present obligation as result of
past event (2)outflow of
economic resources to settle
obligation is probable (3)reliable
estimate

CONTINGENT LIABILITY
present obligation; past
event; whose existence will
be confirmed by occurrence
(non-occurrence) of future
events not wholly within
control of enterprise
Not recognized because:
(1)not probable that outflow
of resources is required to
settle obligation (2)cannot be
measured reliably

Treatment
Nature
Likelihood of
outflow
Treatment

present obligation
probable

present or possible obligation

possible

Recognize as liability (if

measureable) AND disclose in
footnotes

Disclose in footnotes

II. CONTINGENT ASSET: possible asset; past event; existence will be

confirmed by occurrence(non-occurent) of future events not wholly within
control of enterprise
- probable likelihood (51-90%): disclose
- virtually certain likelihood (90%): report as asset
- <50%: do nothing
III. MEASUREMENT for PROVISION = Best Estimate
1. Expected value: SUM(possibility*cost) eg: warranty
2. Most likely outcome: may be best estimate (however, if there are other
possible outcomes that are MOSTLY higher (lower) than most likely outcome,
best estimate = higher (lower) amt)
eg: litigation
IV. PROVISIONS:
1. Litigation:
- Recognize when: (1) time period (2) probability of unfavourable outcome (3)
ability to make reasonable estimate
- Unfiled suits/ unasserted claims: determine (1) probability that suit may be
filed/ claim may be asserted (2) probability of unfavourable outcome if both
are probable + loss is reasonable estimable + cause for action dated before or
on FS date recognize & disclose range of possible loss in footnotes
2. Warranties:
- Recognize when: probable that customer will make warranty claim; can
reasonably estimate cost involved
1. Assurance-type Warranty: at point-of-sale
Dr Warranty Expense
Cr Warranty Liability
2. Service-type Warranty: extended warranty on produce at additional cost
Dr Cash Cr Unearned Warranty Revenue
Straight-line recognition:
Dr Unearned Warranty Revenue
Cr
Warranty Revenue
3. Asset Retirement Obligation (ARO):
- Recognize when: (1) legal/constructive obligation associated with retirement
of long-lived asset (2) can reasonably estimate amount of liability
- Obligating event: decommissioning, dismantling/restoring/reclamation,
removal costs, closure & post-closure costs of landfills
At recognition:
Dr PPE [PV of ARO]
Cr Provision of PPE disposal
Dr PPE [cost of PPE]
Cr Cash
Year-end:
Dr Accumulated Depre [full capitalized amt]
Cr PPE
Dr Interest expense [PV of ARO*discount rate]
Cr Provision of
PPE disposal
Dismantle:
Dr Provision on disposal of PPE [FV of
ARO=estimated amt]
Dr(Cr) Gain(loss) on disposal of PPE
Cr Cash [actual cost]
- Disclosure for each class of provision: (a)beg and end carrying amount (2)additional provisions made during period (3)amt used during
period (4)unused amt reserved during period (5)increase during period in discounted amt due to time & effect of any change in discount
rate

4. Restructuring Provision:
- Include: lease termination penalty, cost directly related to restructuring
(termination of employee, outplacement firm, etc.), termination cost directly
related to restructuring
- Exclude: overhead cost, cost of training staff, cost of moving assets to other
divisions
V. BOND: > 1yr
YTM: rate that gives par value from current selling price
T
Price:

PMT Par Value

+
(1+r
)t
(1+r )T
t =1

Effective rate > coupon rate price < par value (discount)
Date
Cash paid
Interest
Discount
Carrying
expense
amortized
amount of
Bond
1
Issuan
Price
ce
3
2
Payme
Coupon
Effective
Interest
P0 + discount
nt
rate*Par
rate*Par
expense
armotized
value
value
cash paid
Total
Total
Discount on
payments
bond
2

At issuance:

Effective rate < coupon rate price > par value (premium)
Date
Cash paid
Interest
Premium
Carrying
expense
amortized
amount of
Bond
1
Issuan
price
ce
3
2
Payme
Coupon
Effective
Cash paid
P0 premium
nt
rate*Par
rate*carryin
interest
armotized
value
g amount
expense
Total
Total
Premium on
payments
bond
At issuance:
Dr Cash1 [price]
Cr Premium on Bond Payable
Cr Bond Payable [Par value]
At year end:
Dr Interest expense2 [carrying amount*effective
rate]
Dr Premium on Bond Payable
Cr Cash3 [coupon payment]
Subsequent years:
Dr Interest expense [carrying amount*effective rate]
Dr Premium on BP
Cr Cash [coupon payment]
Zero-coupon bonds:
At issuance:
Dr Cash [price (PV)]
Dr Discount on Bond Payable
Cr Bond Payable [Par value]
At year end:
Dr Interest expense [carrying amount*effective
rate]
Cr Discount on Bond Payable
VI. EXTINGUISHMENT OF DEBT: same as PPE
- Reacquisition price > carrying amount recognize (Dr) loss

Dr Bond Payable Dr Loss Cr Discount on Bond payable [parvalue(FV) carrying amount

(PV)] Cr Cash

- Reacquisition price < carrying amount recognize (Cr) gain

- Reacquisition price = carrying amount no gain/loss
VII. Extinguishment by Exchanging Assets/Securities: assets/securities
measured at fair value
VIII. MODIFICATION OF TERMS new issuance of debt
(a) Reduction of i/r (b) Extension of maturity date (c) Reduction of par value
(d)Reduction/deferral of interest payment

Step 1: Calculate PV of new debt

Step 2: Dr Bond Payable (old) Cr Bond Payable (new PV) Cr(Dr) Gain(loss) on
debt restructuring

LEASES

or PV [FV=1000; I/Y=YTM;

N=maturity; PMT=coupon]
Effective rate = coupon rate price = par value (sold at par)
At issuance:
Dr Cash
Cr Bond Payable
Accrued interest expense: Dr Interest Expense [coupon rate*price]
Cr Interest Payable
At payment:
Dr Interest Payable
Cr Cash

effective rate = r/2 if semi-annual

Dr Cash1 [price]
Dr Discount on Bond Payable
Cr Bond Payable [Par value]
At year end:
Dr Interest expense2 [price*effective rate]
Cr Discount on Bond Payable
Cr Cash3 [coupon payment]
Subsequent years:
Dr Interest expense [carrying amount*effective rate]
Cr Discount on BP
Cr Cash [coupon payment]

LESSEE ACCOUNTING

I. FINANCE LEASE: transfer substantially all risks & rewards incidental to

ownership of asset

Lease MAY be Finance Lease if: (1) on cancellation, lessors losses are borne by lessee (2)
gains/losses from fluctuation in fair value borne by lessee (3) lessee has ability to bargain
renewal option
Non-cancellable lease is a lease that is cancellable only: (1)upon the occurrence of some
remote contingency (2)with permission of lessor (3)if lessee enters into new lease for
same/equivalent asset with same lessor (4)upon payment by lessee of an additional amt,
continuation of lease is reasonable certain

a. Transfer of ownership: economic substance over form (even if legal title

not passed, but risks & benefits from use of asset passed)
b. Bargain-purchase option: option to purchase asset at price < fair value
at date option becomes exercisable transfer of ownership; MLP increased;
depreciate leased asset over useful life instead of lease term
c. PV of Minimum Lease Payment (MLP): minimum rental + guaranteed
residual value + penalty for failure to renew + exercise price of bargain
purchase option
- EXCLUDES unguaranteed residual value; executory costs (insurance,
maintenance, taxes); contingent rent (portion of lease payments not fixed,
based on % of future sales, amt of future use, future price indices, future i/r)
expenses

(3) total of future minimum lease payments at end of reporting period (a)1 yr (b)1-5yr
(c)5yr

IV. LESSOR ACCOUNTING:

Operating lease

Recognize &
depreciate asset in
BS
Lease income:
straight-line bases
(regardless of pattern
of rental receipt)

Finance lease
Direct-financing lease
Sales-type lease
(asset fair value = lessors
(asset fair value lessors book
book value)
value)
Lease Receivable = PV
Initial:
[Gross Investment = MLP
Dr Lease Receivable (PV)
+
Dr COGS (asset price)
guaranteed&unguarantee
Cr Asset (asset price)
d residual value]; interest
Cr Sales
rate = implicit rate
Payment:
Finance income: reflect
Dr Cash
constant rate of return
Cr Lease Receivable
Interest revenue:
Dr Lease Receivable [(PV
payments)*implicit rate]
Cr Interest revenue

DILUTIVE SECURITIES & EARNINGS PER SHARE (EPS)

Issuanc
e

ry costs
(b)

payme
nts

BPO
exercis
e date

Guarante
ed
residual
value/BP
O

Minus off
if
included
in
payment
to lessor
-

on liability
(c)
= r%*prev
balance
-

0 on 1st
payment if
annuity due

of lease
liability (d)
=abc

= preceding
balance d

PV of MPL
= PV
[payments
exec costs]
+ PV [GRV[
*BGN or END?

At issuance:

Dr Lease asset
Cr Lease liability [PV of MPL]
Dr Executory Cost (expense)
Dr Lease Liability[d]
Cr Cash[a]
Accrued interest (prev year):
Dr Interest expense[c]
Cr Interest Payable/Cash
Reversal of interest (start of year): Dr Interest Payable/Cash
Cr Interest Expense
At 1st payment:

II. OPERATING LEASE:

Dr Operating lease expense straight-line (even if payments are not on that
basis)
& disclose future minimum lease payments under non-cancellable operating
leases
- Security deposits & last months rent non-current asset
III. Required Disclosures: (1) general description of material leasing arrangements (2)
recon between total future minimum lease payments at end of reporting period & their PVs

Step 1: Calculate total future

taxable amount
Step 2: Calculate Ending DTL
Step 3: Calculate DTL
Step 4: Journal Entries

cumulative, non-convertible

Diluted EPS = NI adjusted for interest(net of tax) + preference

dividend from dilutive securities / WA no. of ordinary shares
outstanding assuming maximum dilution
Convertibles (if-converted method)
Numerator: +debt component of bond*(1-t) + (add back)cumulative
preference dividend
Denominator: +shares assumed to be issued
Options & Warrants (treasury shares method): assume mkt price > exercise
price (dilutive)
Denominator: +incremental shares = [(mkt price option price)/mkt price]*no
of options
Antidilution: if diluted EPS > basic EPS diluted EPS = basic EPS

DEFERRED TAX

I. TEMPORARY DIFFERENCE: between accounting income v taxable income

a. Taxable temporary difference: (accounting income > taxable income) =
Future taxable receipts Deferred Tax Liability
eg: Accrued revenue (taxed when collected in future), excess capital
allowances (tax depre > accounting depre)
Pre-tax income
Temp diff
Taxable Income
Income Tax Payable
(t=30%)

2017
300,000
(180,00
0)
120,000
36,000

Step 1: Calculate total future

taxable amount
= (temporary difference)
Step 2: Calculate Net Income
& Income Tax Payable
Step 3: Deferred Tax Liability

2018

2019

2020

55,000

60,000

65,000

2017 Entries:
55,000 + 60,000 + 65,000 = 180,000
= (180,000)
= Pretax income + (Temp diff) -/+ Permanent
diff
= Net Income*t
Temporary difference*t

Income Tax Expense

90,000
Deferred Tax Liability
54,000
Income Tax Payable
36,000
2018 Entries:
= 60,000 + 65,000 = 125,000
= Total future taxable amt*t = 125,000*t
= Beg DTL End DTL = 54,000 37,500 =
16,500
Income Tax Expense
Deferred Tax Liability
[DTL = 16,500]
Income Tax Payable
xxx

b. Deductible temporary difference: (accounting income < taxable income)

= Future deductible amount Deferred Tax Asset
eg: Unearned revenue (collected & taxed today); accrued expenses
(deductible only upon payment); excess tax depreciation (tax depre > acc
depre)

I. FRS 32: Equity v Liability

Equity: residual interest in asset of issuer after deducting all its liabilities
Liability: contractual obligation, unfavourable to issuer (if dont payenforce) Pre-tax income
- Preference share: classified as equity (tier-1 capital: common in bank, bc can meet capital adequacy ratio more easily); non-

a. Convertible debt: residual allocation method (with-and-without); at time

of issuance
Equity component= Fair Value of convertible debt Fair value of liability
component
Dr Cash [Par Value] Cr Bond Payable [price] Cr Equity component of Bond
RECOGNITION:
b. Stock warrants: options to buy ordinary shares @ fixed price (exercise
a. Inception date: earlier of date of lease agreement v date of commitment
when stock price > exercise price)
by parties to principal provisions of lease; at this date, lease is classified as
II. EPS
operating/finance lease; amt determined
Basic EPS = (NI preference dividends1) / (WA no. of shares
b. Commencement of lease term: recognition date; date from which lessee outstanding2)
is entitled to exercise its right to use the asset
1. Preference dividend: (if declare or cumulative) = no of preference
c. Amount: lower of fair value of asset v PV of minimum lease payments
shares*ParValue*%
2. WA no of shares outstanding:
+ Initial direct costs: directly attributable to negotiating & arranging
Date
Shares
Shares outstanding
Fraction of yr
Dividend
Stock
leasecapitalized
split
WA shares
+ Discount rate: implicit rate; if cannot be determined lessees
(date)
(no of shares outstanding) (how long)
[1+div]
*stock split
incremental borrowing rate
Issued/Sold 120k shares: shares = 120k
Issued/Sold 10% stock dividend: shares = 10%*current shares
SUBSEQUENT MEASUREMENT
outstanding
a. Depreciation of leased asset:
Acquired 100k treasury stock: shares = -100k
Dr Depreciation expense
[(Amount capitalized GRV)/Useful life]
Issued/Sold 3-for-1 stock split: adjust ALL previous WA shares*3
Cr Accumulated Depreciation
Issued 50% Share Dividend: adjust ALL previous WA shares*1.05
- BPO depreciate over useful life
- no BOP depreciate over shorter of: lease term v economic life of asset
Reissue 60k shares treasury stock: shares = +60k
Reacquired 60k treasury shares (bought 60k shares and held as
b. Amortize lease liability: over term of lease by effective interest method
treasury shares): shares = -60k
Date
Annual
Executo
Interest (r%)
Reduction
Lease liability
lease
paymen
t (a)

Step 4: Journal Entries

Temp diff
Taxable Income
Income Tax Payable
(t=34%)

2017
200,000
155,000
355,000
120,700

Step 1: Calculate total future

taxable amount
= temporary difference
Step 2: Calculate Net Income
& Income Tax Payable
Step 3: Deferred Tax Asset
Step 4: Journal Entries

Step 1: Calculate total future

taxable amount
Step 2: Calculate End DTL
Step 3: Calculate DTL
Step 4: Journal Entries

2018

2019

2020

(50,000)

(65,000)

(40,000)

2017 Entries:
50,000 + 65,000 + 40,000 = 155,000
= 155,000
= Pretax income + Temp diff -/+ Permanent diff
= Net Income*t
Temporary difference*t = 155,000*0.34 =
52,700
Income Tax Expense
68,000
Deferred Tax Asset
52,700
Income Tax Payable
120,700
2018 Entries:
= 65,000 + 40,000 = 105,000
= Total future taxable amt*t = 105,000*t
= Beg DTA End DTA = 52,700 35,700 =
17,000
Income Tax Expense
Deferred Tax Asset
[DTA = 17,000]
Income Tax Payable
xxx

LOSS CARRY-BACK/ CARRY-FORWARD

Loss Carryback:

Dr Income Tax Refund Receivable [tax paid prev year]

Cr Benefit due to Loss carryback (Income Tax Expense)
Loss Carryforward:
Dr DTA [remaining amt of tax payable - loss
carryback]
Cr Benefit due to Loss Carryforward (Income Tax Expense)
Realized Loss Carryforward:
Dr Income Tax Expense
Cr DTA

ACCOUNTING CHANGES

- 3 approaches:
A. Currently (one-time catch up) not allowed
6 yr
Y1
240k
40k [30k]
40k [30k]
8yr
Y1
160k
180k
"One time diff" = 20k
Dr PPE 20k
Cr Exceptional item due to acc change (P&L) cos can easily increase their
earnings
B. Retrospectively: currently allowed (FRS 8) for change in acc policy
C. Prospectively: change in acc estimate
I. Change in ACCOUNTING POLICY (eg: avg cost to FIFO; cost-recovery to
%-of-completion; cost to revaluation model)
Retrospective approach: adjust opening balance of prior periods & disclose
comparative amount
Eg: Change from Average cost to FIFO
If Net Income: Dr Inventory Cr Retained Earnings
If Net Income: Dr Retained Earnings Cr Inventory
- Conditions: (1)required by standard/interpretation (2)results in FS providing reliable &
more relevant info
*note: Adoption of new principle to recognize events occurred for the first time or previously
immaterial is NOT an accounting change
- Exceptions: (1)impracticable to determine either the period-specific effects/cumulative
effect of change apply at beginning of period for which retrospective application is
practicable (2)change in depre/amortization method change in accounting estimate
- Disclose: (1)nature of change (2)reasons why applying change leads to more reliable &
more relevant info (3)amt of adjustment for each item affected & for basic and diluted EPS

II. Change in ACCOUNTING ESTIMATE: adjustment of carrying amt of

asset/liability (uncollectible receivables; inventory obsolescence; fair value of
assets/liabilities; useful lives; residual value; liability for warranty costs &
income tax)
Prospective approach: recognize effects of change in P&L in current & future
periods; adjust carrying amount in current period; disclose nature & amount
III. Change in REPORTING ENTITY: change in composition (consolidated FS,
change in subsidiaries)
disclose in footnotes nature & effect of change (provide pro forma figures
for all prior periods)
IV. ACCOUNTING ERROR: NOT an accounting change (math mistake; policy
inconsistent with FRS; failure to accrue/defer expenses/revenue; misuse of
facts not bona-fide)
- Materiality: collectively (or individually) can affect economic decisions taken
on FS [size&nature]
Retrospective approach: correct MATERIAL prior period errors in the 1st
authorized FS after discovery of error restate comparative amount in prior
periods & restate opening balances of earliest prior period (if applicable)

- Disclose: (1)nature (2)amt of correction for FS line item & basic and diluted
EPS (3)amt of correction at beginning of earliest prior period presented

OPERATING SEGMENTS

- can be aggregated if: similar products and services; similar production

processes; similar cust

- CONDITIONS:
- Definition: component of entity: (1)engage in biz activities: earn revenues & - Total revenue from external sources by all reportable segments MUST 75%
incur expenses (2)operating results are regularly reviewed by entitys chief
total revenue
operating decision maker (3)discrete financial info is available
- Interperiod comparability must be maintained
- Management approach: operating segments identified on same basis as
- Practical limit: 10 = reasonable upper limit
info is reported internall to management enable investors to understand
risks, opportunities, measures that management think are important, see
- DISCLOSURES:
through the eyes of a manager
- General info: how co identifies each separately reportable segment; type of
-CRITERIA TO REPORT:
products/services from which each reportable segment earns its revenues;
(1) exceeds any of the 3 quantitative thresholds:
- info on segment profit/loss & segment assets
Revenue test: reported revenue (external+internal) 10% of combined
- info on segment revenues & segment profit/loss, if regularly provided to the
revenue
chief operating decision maker
Profit(loss) test: profit/|loss| 10% of greater of [(i) combined profit of all
- Measurement: same basis as is used internally for evaluating operating
operating segments that did not report a loss (ii) combined loss of all
segment perf; adjustments & eliminations made in preparing FS shall be
operating segments that reported a loss]
included only if included in measure used by chief operating decision maker
Asset test: assets 10% of combined assets of all operating segments
- ENTITY-WIDE DISCLOSURE: provided in footnotes only if not provided as
(2) has been identified/results from aggregating 2 or more segments:
part of reportable segment info: (1)revenue by product & service (2) revenue
& non-current assets by geographic area (c) revenue from major customers