US CPA Exam
Factoring Receivables

Dutch GAAP (RJ)
Goodwill Calculation

Dutch RJ
Income Taxes

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Your RJ Question on Goodwill

SCENARIO DUTCH GAAP (DAS)

According to the RJ Acquisitions, Mergers and Goodwill Please consider the following facts

At the beginning of the reporting period Company A acquired 100% of the shares in company B for the purchase price of 140.

The fair value of the identifiable assets and liabilities of B as of acquisition date has been determined at 110.

The economic life of goodwill has been determined to be 10 years.

How should Company A account for the goodwill at the end of the reporting period in its consolidated financial statements?

Option 1). Positive goodwill recognized as an intangible asset of 30

Option 2). Positive goodwill recognized as an intangible asset of 0

Option 3). Negative goodwill recognized as an accrual of 27

Option 4). Positive goodwill recognized as an intangible asset of 27.”

ChatMe.CPA Answer

According to the RJ Acquisitions, mergers, and goodwill, goodwill is calculated as the excess of the purchase price over the fair value of the identifiable net assets of the acquired company at the acquisition date.

If the acquisition was at the beginning of the reporting period and the economic life of the goodwill has been determined to be 10 years, Company A would amortize the goodwill on a straight-line basis over its economic life unless there is an indication that the goodwill might be impaired.

Given the facts:

1. Purchase price of Company B by Company A = 140

2. Fair value of identifiable assets and liabilities of Company B = 110

3. Economic life of goodwill = 10 years

The goodwill would be calculated as follows:

Goodwill = Purchase price - Fair value of identifiable net assets

Goodwill = 140 - 110

Goodwill = 30

The annual amortization expense for the goodwill would be:

Annual amortization expense = Goodwill / Economic life

Annual amortization expense = 30 / 10

Annual amortization expense = 3

At the end of the reporting period, which is assumed to be one year after the acquisition, Company A would recognize an amortization expense of 3. Therefore, the carrying amount of goodwill at the end of the reporting period would be:

Carrying amount of goodwill = Initial goodwill - Accumulated amortization

Carrying amount of goodwill = 30 - 3

Carrying amount of goodwill = 27

The correct answer at the end of the reporting period in the consolidated financial statements would be:

OPTION 4: Positive goodwill recognized as an intangible asset of 27

Your US GAAP Question

SCENARIO US GAAP ASC 606

Can you briefly summarize the new revenue recognition standard under U.S. GAAP?

Sure, the new revenue recognition standard under U.S. GAAP is outlined in Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). It replaces virtually all existing revenue recognition guidance and applies to all entities that enter into contracts to provide goods or services, unless those contracts are within the scope of other standards (e.g., lease contracts, insurance contracts).

The core principle of the standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The standard outlines a five-step model to achieve this core principle:

1. *Identify the contract(s) with a customer*: A contract is an agreement between two or more parties that creates enforceable rights and obligations.

2. *Identify the performance obligations in the contract*: A performance obligation is a promise in a contract with a customer to transfer a good or service to the customer.

3. *Determine the transaction price*: The transaction price is the amount of consideration in a contract to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer.

4. *Allocate the transaction price to the performance obligations in the contract*: For a contract that has more than one performance obligation, the entity will allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for satisfying each performance obligation.

5. *Recognize revenue when (or as) the entity satisfies a performance obligation*: An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer.

The standard also provides guidance on several related topics, including sales with a right of return, warranties, principal versus agent considerations, customer options for additional goods or services, nonrefundable upfront fees, and disclosures.

Your IFRS Question

Scenario IFRS 16 Leases

What are the new requirements for lease accounting under IFRS 16?

IFRS 16 'Leases' was issued by the International Accounting Standards Board (IASB) in January 2016, and it replaced IAS 17 'Leases'. Here are the key requirements under IFRS 16:

1. *Single Lessee Accounting Model*: IFRS 16 introduces a single lessee accounting model, which requires the recognition of assets and liabilities for all leases, with some exceptions for short-term leases (less than 12 months) and leases of low-value assets.

2. *Recognition of Right-of-Use Asset and Lease Liability*: At the commencement of the lease, the lessee recognizes a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term.

3. *Measurement*: The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted at the rate implicit in the lease if it can be readily determined. If that rate cannot be readily determined, the lessee shall use their incremental borrowing rate. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability, any lease payments made at or before the commencement date, any initial direct costs incurred, and an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset.

4. *Depreciation and Interest Expense*: The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term, while interest on the lease liability is calculated using the effective interest method.

5. *Disclosure*: Lessees are required to provide detailed quantitative and qualitative disclosures to meet the objective of enabling users of financial statements to assess the effect that leases have on the financial position, financial performance, and cash flows of the lessee.

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