Technical Accounting Topics

Overview

The revenue recognition standards (ASC 606 in the US and IFRS 15 internationally) establish a comprehensive framework for recognizing revenue from contracts with customers. Both standards follow a five-step model to ensure consistent revenue recognition across industries and jurisdictions.

Five-Step Model

1. Identify the Contract: Determine whether a contract exists per ASC 606-10-25-1 (contract must have approval, identify rights and obligations, payment terms, commercial substance, and collectibility likely)
2. Identify Performance Obligations: Determine distinct goods or services promised in the contract (per ASC 606-10-25-19, distinct if customer can benefit on its own and separately identifiable)
3. Determine Transaction Price: Calculate the amount of consideration expected to be received, including variable consideration (estimated using expected value or most likely amount method)
4. Allocate Transaction Price: Allocate the transaction price to each performance obligation based on standalone selling prices (direct, adjusted market, or residual approach)
5. Recognize Revenue: Recognize revenue when (or as) each performance obligation is satisfied (point in time vs. over time per ASC 606-10-25-27)

Overview

The lease accounting standards fundamentally changed lease accounting by requiring lessees to recognize most leases on the balance sheet. ASC 842 (US GAAP) maintains a dual model distinguishing operating and finance leases, while IFRS 16 uses a single model for all leases (except short-term and low-value leases).

Acquisition Method

All business combinations are accounted for using the acquisition method, which requires measurement at fair value of consideration transferred, assets acquired, and liabilities assumed at the acquisition date.

1. Identify Acquirer: Entity that obtains control (per ASC 810-10-25)
2. Determine Acquisition Date: Date acquirer obtains control
3. Recognize & Measure: Identify and measure assets acquired, liabilities assumed, and non-controlling interests at fair value
4. Recognize & Measure Goodwill or Gain: Calculate goodwill or bargain purchase gain

Overview

ASC 718 requires entities to measure the cost of share-based payment awards based on the fair value of the equity instruments issued. This standard applies to all share-based payment transactions, including stock options, restricted stock, stock appreciation rights, and employee stock purchase plans.

Fair Value Measurement

The fair value of share-based payment awards is measured at the grant date using an option-pricing model that takes into account various factors including exercise price, expected term, volatility, risk-free interest rate, and expected dividends.

• • Black-Scholes Model: Most commonly used for employee stock options (ASC 718-10-55-15)
• • Binomial Model: Alternative approach that can accommodate more complex terms and conditions
• • Market Price: For traded options or restricted stock, use observable market prices when available

Overview

ASC 740 establishes the accounting and disclosure requirements for income taxes, including both current and deferred taxes. The standard requires recognition of deferred tax assets and liabilities for temporary differences between financial statement carrying amounts and tax bases.

Deferred Tax Accounting

Deferred taxes arise from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases.

1. Identify Temporary Differences: Differences that will result in taxable or deductible amounts in future years when the carrying amount is recovered or settled
2. Determine Tax Rate: Use enacted tax rates expected to apply in periods when temporary differences reverse (ASC 740-10-30-8)
3. Recognize Deferred Tax Asset/Liability: Measure at enacted tax rates (ASC 740-10-30-2)
4. Valuation Allowance: Reduce deferred tax assets by valuation allowance if "more likely than not" that some portion will not be realized (ASC 740-10-30-18)

Overview

ASC 810 establishes the accounting and reporting requirements for consolidating financial statements when one entity has a controlling financial interest in another. The standard addresses both voting interest entities and variable interest entities (VIEs).

Variable Interest Entities (VIEs)

A VIE is a legal entity in which equity investors lack one or more of the characteristics of a controlling financial interest, typically including insufficient equity at risk, lack of decision-making rights, or lack of obligation to absorb losses or right to receive returns.

• • Primary Beneficiary Determination: Entity that has power to direct activities that most significantly impact VIE's economic performance and obligation to absorb losses or right to receive benefits (ASC 810-10-25-38A)
• • Consolidation Requirements: Primary beneficiary must consolidate VIE regardless of voting interest percentage

Overview

ASC 830 (US GAAP) and IFRS 21 establish accounting and reporting requirements for foreign currency transactions and translation of foreign currency financial statements. The standards address functional currency determination, translation methods, and recognition of foreign currency gains and losses.

Overview

ASC 820 (US GAAP) and IFRS 13 establish a comprehensive framework for measuring fair value and require extensive disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fair Value Hierarchy

Fair value measurements are categorized into a three-level hierarchy based on the inputs used in the valuation: