2014 FASB Update Intermediate Accounting

1611 Pages·2014·38.76 MB·English

by  Donald E. Kieso

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Key learning aids to help you master the
textbook material and prepare you for
a successful career.
CHAPTER PREVIEW
As our opening story indicates, sustainability strategies are taking
The Chapter Preview summarizes the major issues discussed PREVIEW OF CHAPTER 12 on increased importance for companies like Southwest Airlines and
Clorox. Reporting challenges for effective sustainability investments
in the chapter,and provides students with a visual outline of are similar to those for intangible assets. In this chapter, we explain the basic conceptual and reporting issues
related to intangible assets. The content and organization of the chapter are as follows.
the key topics.
Intangible Assets
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• Characteristics • Marketing-related • Limited-life • Identifying R&D • Intangible assets
• Valuation • Customer-related intangibles • Accounting for R&D • R&D costs
• Amortization • Artistic-related • Indefinite-life • Similar costs
• Contract-related intangibles other
• Technology-related than goodwill
• Goodwill • Goodwill
UNDERLYING CONCEPTS • Summary
Underlying Concepts
The Underlying Concepts highlight and explain major
The controversy surrounding the
conceptual topics in the chapter. accounting for R&D expenditures
reflects a debate about whether
scu12cIhnt aenxgpibelenAdssietutsr.iensdd m Paegee t6 t5h3e 1d/e8/f-13 10:39 AM f-535 /Users/f-535/Desktop/Praveen/9654969236
inition of an asset. If so, then an
“expense all R&D costs” policy
recs1u2lItnsta inng iobvleeArsssteattse.indd edx Ppaegnes 6e6s6 02/01/13 7:52 PM f-391 /208/WB00806/XXXXXXXXXXXXX/ch12/text_s
and understated assets.
WHAT DO THE NUMBERS MEAN?
What do the numbers mean? DEFINITELY INDEFINITE
The “What do the numbers mean?”boxes further The importance of intangible asset classification as either to limited-life, with an expected life of 21.33 years (a fairly
limited-life or indefinite-life is illustrated in the experi- definite useful life) and, shortly thereafter, wrote off this
students’ understanding of key concepts with practical, ence of Outdoor Channel Holdings. Here’s what hap- intangible completely.
pened. Outdoor Channel recorded an intangible asset Apparently, the company was overly optimistic about the
real-world examples. related to the value of an important distributor relation- expected future cash flows arising from the distributor rela-
ship, purchased from another company. At that time, it tionship. As a result of that optimism, income in the second
classified the relationship as indefinite-life. Thus, in the year was overstated by $9.5 million, or 14 percent, and the
first two years of the asset’s life, Outdoor Channel re- impairment recorded in the third year amounted to 7 percent
corded no amortization expense on this asset. In the third of assets. From indefinite-life to limited-life to worthless in
year, investors were surprised to find that Outdoor Chan- two short years—investors were surely hurt by Outdoor’s
nel changed the classification of the distributor relationship aggressive intangible asset classifi cation.
Source: Jack Ciesielski, The AAO Weblog, www.accountingobserver.com/blog/ (January 12, 2007).
INTERNATIONAL PERSPECTIVE International
Perspective
International Perspectives provide students with specific
IFRS requires the capitalization
examples of how global companies (and other countries) of appropriate development
expenditures. This conflicts
implement key accounting regulations. They also provide with GAAP.
examples of how and where IFRS differs from GAAP.
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EVOLVING ISSUE
Evolving Issue RECOGNITION OF R&D AND INTERNALLY GENER
The Evolving Issue feature introduces and discusses a The requirement that companies expense immediately all showed a significant relati
R&D costs (as well as start-up costs) incurred internally is a subsequent benefits in th
current topic in the accounting industry in which the practical solution. It ensures consistency in practice and uni- earnings, and shareholder v
formity among companies. But the practice of immediately Another study found that
profession may be encountering controversy or nearing writing off expenditures made in the expectation of benefit- earnings usefulness for com
ing future periods is conceptually incorrect. from capitalizing to exp
resolution. The feature shows how the key standard-setting Proponents of immediate expensing contend that from an decline appears to persist
income statement standpoint, long-run application of this The current accountin
organizations make decisions to adjust to the changing standard frequently makes little difference. They argue that generated intangible ass
because of the ongoing nature of most companies’ R&D trade-offs made among r
global business environment. activities, the amount of R&D cost charged to expense each and cost-benefit consider
accounting period is about the same, whether there is immedi- completed some limited-
ate expensing or capitalization and subsequent amortization. for intangible assets, and
Others criticize this practice. They believe that the balance joint project on the accou
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DEMONSTRATION PROBLEM
Sky Co., organized in 2014, provided you with the following information.
1. Purchased a license for $20,000 on July 1, 2014. The license gives Sky exclusive rights to sell its
services in the tri-state region and will expire on July 1, 2022.
2. Purchased a patent on January 2, 2015, for $40,000. It is estimated to have a 5-year life.
3. Costs incurred to develop an exclusive Internet connection process as of June 1, 2015, were $45,000.
The process has an indefinite life.
4. On April 1, 2015, Sky Co. purchased a small circuit board manufacturer for $350,000. Goodwill
recorded in the transaction was $90,000.
DEMONSTRATION PROBLEM 5. O$1n1 ,J4u0l0y. 1, 2015, legal fees for successful defense of the patent purchased on January 2, 2015, were
6. Research and development costs incurred as of September 1, 2015, were $75,000.
The Demonstration Problem provides a model for how to Instructions
(a)Prepare the journal entries to record all the entries related to the patent during 2015.
solve end-of-chapter material. (b) At December 31, 2015, an impairment test is performed on the license purchased in 2014. It is
estimated that the net cash flows to be received from the license will be $13,000, and its fair value is
$7,000. Compute the amount of impairment, if any, to be recorded on December 31, 2015.
(c) What is the amount to be reported for intangible assets on the balance sheet at December 31, 2014?
At December 31, 2015?
FASB CODIFICATION
FASB CODIFICATION
The FASB Codification refers students to the relevant
FASB Codification References
FASB literature for the key concepts presented in [1] FASB ASC 350-10-05. [Predecessor literature: “Goodwill and Other Intangible Assets,” Statement of Financial Accounting
Standards No. 142 (Norwalk, Conn.: FASB, 2001).]
each chapter. [2] FASB ASC 350-30-35. [Predecessor literature: “Goodwill and Other Intangible Assets,” Statement of Financial Accounting
Standards No. 142 (Norwalk, Conn.: FASB, 2001), par. 11.]
[3] FASB ASC 805-10. [Predecessor literature: “Business Combinations,” Statement ofFinancial Accounting Standards No. 141R
(Norwalk, Conn.: FASB, 2007).]
c12IntangibleAssets.indd Page 690 28/12/12[ 43]:0 0F APMSB f- 3A9S2 C 350-30-35. [Predecessor literature: “Goodwill and Other Intangible As~s/eDtess,”k toSpt/aNteamlinei%nt2 0o2f 8F.1in2/acnhc1i2al Accounting
Standards No. 142 (Norwalk, Conn.: FASB, 2001), par. B55.]
[5] FASB ASC 805-10-20. [Predecessor literature: “Business Combinations,” Statement of Financial Accounting Standards
No. 141R (Norwalk, Conn.: FASB, 2007).]
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USING YOUR JUDGMENT
USING YOUR JUDGMENT
The Using Your Judgment section FINANCIAL REPORTING
provides students with real-world
Financial Reporting Problem
homework problems covering topics The Procter & Gamble Company (P&G)
The financial statements of P&G are presented in Appendix 5B. The company’s complete annual
such as financial reporting,financial report, including the notes to the financial statements, can be accessed at the book’s companion website,
www.wiley.com/college/kieso.
statement analysis,and professional Instructions
research. Refer to P&G’s financial statements and the accompanying notes to answer the following questions.
(a) Does P&G report any intangible assets, especially goodwill, in its 2011 financial statements and
accompanying notes?
(b) How much research and development (R&D) cost was expensed by P&G in 2010 and 2011? What
percentage of sales revenue and net income did P&G spend on R&D in 2010 and 2011?
PROBLEMS SET B
PROBLEMS SET B
In addition to the B Set of Exercises,we now provide
See the book’s companion website, at www.wiley.com/college/kieso, for an additional
an additional set of problems for each chapter,based on set of problems.
the problems in the textbook. The B Set of Problems are
available in WileyPLUSand on the book’s companion
website,at www.wiley.com/college/kieso. c12IntangibleAssets.indd Page 693 28/12/12 3:00 PM f-392 ~/Desktop/Nalini%2028.12/ch12
IFRS INSIGHTS IFRS INSIGHTS
IFRS Insights offer students a detailed discussion as
well as assessment material of international accounting
There are some significant differences between IFRS and GAAP in the accounting
standards at the end of each chapter. fporre sbeontthe di ninta InAgSib 3le8 (a“sIsnettasn agnibdl ei mApssaeitrsm”)e.n ItFsR. SIF rRelSa treedla ttoe dim tpo aiinrmtanengtisb lies faosusentds iins
IAS 36 (“Impairment of Assets”).
CPA Exam
Readiness
How Would You Score If You Took
the CPA Exam Today?
Before you can call yourself a CPA, you’ll have to pass one of the toughest
licensure exams in any profession.
To help you get a sense of what the exam is like and see where you stand,
we’ve created a quick assessment consisting of actual exam questions from
Wiley’s industry-leading CPAexcel Review Course software.
Find out what it’s like to face off against real exam questions and see how you
would fare if you took the real exam today.
Visit CPAexcel.com/Kieso to start your quick assessment today.
CPA Exam Support Site for Kieso Adopters
Intermediate Accounting is a course that is a bridge to the profession.
Throughout the course, you will be learning key concepts that you will be tested
on if you choose to sit for the CPA exam. To help you understand how the con-
cepts you are learning will be presented in the actual exam environment as well
as learn more about the exam, please visit CPAexcel.com/Kieso.
Donald E. Kieso PhD, CPA
Northern Illinois University
DeKalb, Illinois
Jerry J. Weygandt PhD, CPA
University of Wisconsin—Madison
Madison, Wisconsin
Terry D. Warfield, PhD
University of Wisconsin—Madison
Madison, Wisconsin
Dedicated to
our wives, Donna,Enid,and Mary,
for their love,
support, and encouragement
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1980, 1981, 1982, 1983, 1984, 1985, 1986, 1987, 1988, 1990, 1991, 1992, and 1993 by the American Institute of Certified Public Accountants, Inc., is adapted with permission.
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Reprinted with permission. Copies of complete documents are available from Financial Accounting Standards Board.
Material from the Certificate in Management Accounting Examinations, copyright © 1975, 1976, 1977, 1978,1979, 1980, 1981, 1982, 1983, 1984, 1985, 1986, 1987, 1988, 1989,
1990, 1991, 1992, and 1993 by the Institute of Certified Management Accountants, 10 Paragon Drive, Montvale, NJ 07645, is adapt ed with permission.
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The financial statements and accompanying notes reprinted from the 2011 Annual Report of Procter & Gamble Company are courtesy of P&G, copyright © 2011, all rights reserved.
ISBN-13 978-1-118-98531-1
BRV ISBN-13 978-1-118-93878-2
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
Brief
Contents
1 Financial Accounting and Accounting Standards 2
2 Conceptual Framework for Financial Reporting 42
3 The Accounting Information System 82
4 Income Statement and Related Information 158
5 Balance Sheet and Statement of Cash Flows 212
6 Accounting and the Time Value of Money 286
7 Cash and Receivables 344
8 Valuation of Inventories: A Cost-Basis Approach 414
9 Inventories: Additional Valuation Issues 472
10 Acquisition and Disposition of Property, Plant,
and Equipment 536
11 Depreciation, Impairments, and Depletion 588
12 Intangible Assets 648
13 Current Liabilities and Contingencies 700
14 Long-Term Liabilities 762
15 Stockholders’ Equity 820
16 Dilutive Securities and Earnings per Share 882
17 Investments 950
18 Revenue Recognition 1040
19 Accounting for Income Taxes 1116
20 Accounting for Pensions and Postretirement
Benefits 1182
21 Accounting for Leases 1268
22 Accounting Changes and Error Analysis 1342
23 Statement of Cash Flows 1410
24 Full Disclosure in Financial Reporting 1486
iii
Author
Commitment
Kieso Weygandt Warfield
Don Jerry Terry
Donald E. Kieso, PhD, CPA, received his Jerry J. Weygandt, PhD, CPA, is Arthur Terry D. Warfield, PhD, is the Pricewater-
bachelor’s degree from Aurora University Andersen Alumni Emeritus Professor houseCoopers Professor in Accounting at
and his doctorate in accounting from the of Accounting at the University of the University of Wisconsin—Madison. He
University of Illinois. He has served as Wisconsin—Madison. He holds a Ph.D. received a B.S. and M.B.A. from Indiana
chairman of the Department of Accountancy in accounting from the University of University and a Ph.D. in accounting from
and is currently the KPMG Emeritus Illinois. Articles by Professor Weygandt the University of Iowa. Professor Warfield’s
Professor of Accountancy at Northern have appeared in the Accounting Review, area of expertise is financial reporting, and
Illinois University.He has public accounting Journal of Accounting Research, Accounting prior to his academic career, he worked
experience with Price Waterhouse & Co. Horizons, Journal of Accountancy,and for five years in the banking industry. He
(San Francisco and Chicago) and Arthur other academic and professional journals. served as the Academic Accounting Fellow
Andersen & Co. (Chicago)and research These articles have examined such in the Office of the Chief Accountant at the
experience with the Research Division of financial reporting issues as accounting U.S. Securities and Exchange Commission
the American Institute of Certified Public for price-level adjustments, pensions, in Washington, D.C. from 1995–1996.
Accountants (New York). He has done convertible securities, stock option ProfessorWarfield’s primary research
post-doctorate work as a Visiting Scholar contracts, and interim reports. Professor interests concern financial accounting
at the University of California at Berkeley Weygandt is author of other accounting standards and disclosure policies. He has
and is a recipient of NIU’s Teaching and financial reporting books and is a published scholarly articles in The Accounting
Excellence Award and four Golden Apple member of the American Accounting Review, Journal of Accounting and
Teaching Awards. Professor Kieso is the Association, the American Institute of Economics, Research in Accounting
author of other accounting and business Certified Public Accountants, and the Regulation, andAccounting Horizons,
books and is a member of the American Wisconsin Society of Certified Public and he has served on the editorial boards
Accounting Association, the American Accountants. He has served on numerous ofThe Accounting Review, Accounting
Institute of Certified Public Accountants, committees of the American Accounting Horizons, andIssues in Accounting
and the Illinois CPA Society. He has served Association and as a member of the Education.He has served as president of
as a member of the Board of Directors editorial board of the Accounting Review; the Financial Accounting and Reporting
of the Illinois CPA Society, then AACSB’s he also has served as President and Section, the Financial Accounting Standards
Accounting Accreditation Committees, the Secretary-Treasurer of the American Committee of the American Accounting
State of Illinois Comptroller’s Commission, Accounting Association. In addition, Association (Chair 1995–1996), and on
as Secretary-Treasurer of the Federation of he has been actively involved with the the AAA-FASB Research Conference
Schools of Accountancy, and as Secretary- American Institute of Certified Public Committee. He also servedon the Financial
Treasurer of the American Accounting Accountants and has been a member Accounting Standards Advisory Council
Association. Professor Kieso is currently of the Accounting Standards Executive of the Financial Accounting Standards
serving on the Board of Trustees and Committee (AcSEC) of that organization. Board. Professor Warfield has received
Executive Committee of Aurora University, He has served on the FASB task force that teaching awards at both the Universityof
as a member of the Board of Directors of examined the reporting issues related to Iowa and the University of Wisconsin,
Kishwaukee Community Hospital, and accounting for income taxes and served and he was named to the Teaching
as Treasurer and Director of Valley West as a trustee of the Financial Accounting Academy at the University of Wisconsin
Community Hospital. From 1989 to 1993, Foundation. Professor Weygandt has in 1995. Professor Warfield has developed
he served as a charter member of the received the Chancellor’s Award for and published several case studies based
National Accounting Education Change Excellence in Teaching and the Beta on his research for use in accounting
Commission. He is the recipient of the Gamma Sigma Dean’s Teaching Award. classes. These cases have been selected
Outstanding Accounting Educator Award He is on the board of directors of M & I for the AICPA Professor-Practitioner
from the Illinois CPA Society, the FSA’s Bank of Southern Wisconsin. He is the Case Development Program and have
Joseph A. Silvoso Award of Merit, the NIU recipient of the Wisconsin Institute of been published in Issues in Accounting
Foundation’s Humanitarian Award for CPA’s Outstanding Educator’s Award and Education.
Service to Higher Education, a Distinguished the Lifetime Achievement Award. In 2001,
Service Award from the Illinois CPA Society, he received the American Accounting
and in 2003 an honorary doctoratefrom Association’s Outstanding Educator
Aurora University. Award.
From the
Authors
Accounting continues to be one of the most employable, sought-after majors, according to entry-level job site CollegeGrad.com.One
reason for this interest is found in the statement by former Secretary of the Treasury and Economic Advisor to the President,
Lawrence Summers. He noted that the single-most important innovation shaping our capital markets was the idea of generally
accepted accounting principles (GAAP). We agree with Mr. Summers. Relevant and reliable financial information is a necessity for
viable capital markets. Without it, our markets would be chaotic, and our standard of living would decrease.
This textbook is the market leader in providing the tools needed to understand what GAAP is and how it is applied in practice.
Mastery of this material will be invaluable to you in whatever field you select.
Through many editions, this textbook has continued to reflect the constant changes taking place in the GAAP environment.
This edition continues this tradition, which has become even more significant as the financial reporting environment is exploding with
major change. Here are three areas of major importance that are now incorporated extensively into this edition of the textbook.
Convergence of U.S. GAAP and IFRS
As mentioned above, the most important innovation shaping our capital marketswas the idea
of U.S. GAAP. It might be said that it would be even better if we had one common set of “If this textbook helps you
appreciate the challenges,
accounting rules for the whole world, which will make it easier for international investors to
worth, and limitations of finan-
compare the financial results of companies from different countries. That is happening quickly
cial reporting, if it encourages
as U.S. GAAP and international accounting standards are converging. The convergence you to evaluate critically and
process has resulted in a number of common standards between U.S. GAAP and understand financial accounting
International Financial Reporting Standards (IFRS). And you have the chance to be on concepts and practice, and if it
prepares you for advanced study,
the ground floor as we develop for you the similarities and differences in the two systems
professional examinations, and the
that ultimately will be one.
successful and ethicalpursuit of
your career in accounting or
A Fair Value Movement
business in a global economy,
The FASB believes that fair value information is more relevant to users than historical cost. As a then we will have attained our
result, there is more information that is being reported on this basis, and even more will occur in objectives.”
the future. The financial press is full of articles discussing how financial institutions must fair
value their assets, which has led to massive losses during the recent credit crisis. In addition, additional insight into the reliability
related to fair values is being addressed and disclosed to help investors make important capital allocation decisions. We devote a
considerable amount of material that discusses and illustrates fair value concepts in this edition.
A New Way of Looking at Generally Accepted Accounting Principles (GAAP)
Learning GAAP used to be a daunting task, as it is comprised of many standards that vary in form, completeness, and structure.
Fortunately, the profession has developed the Financial Accounting Standards Board Codification (often referred to as the
Codification). This Codification provides in one place all the GAAP related to a given topic. This textbook is the first to incorporate
this Codification—it will make learning GAAP easier and more interesting!
Intermediate Accounting is the market-leading textbook in providing the tools needed to understand what GAAP is and
how it is applied in practice. With this Fifteenth Edition, we strive to continue to provide the material needed to understand this
subject area. The textbook is comprehensive and up-to-date. We also include proven pedagogical tools, designed to help you
learn more effectively and to answer the changing needs of this course. Look inside the front cover for a detailed description of
all of the learning tools of the textbook.
We are excited about Intermediate Accounting, Fifteenth Edition. We believe it meets an important objective of providing
useful information to educators and students interested in learning about both GAAP and IFRS. Suggestions and comments from
users of this textbook will be appreciated. Please feel free to e-mail any one of us at [email protected].
Donald E. Kieso Jerry J. Weygandt Terry D. Warfield
DeKalb, Illinois Madison, Wisconsin Madison, Wisconsin
v
What’s New?
The Fifteenth Edition expands our emphasis on student learning and improves upon a teaching and learning pack-
age that instructors and students have rated the highest in customer satisfaction. Based on extensive reviews, focus
groups, and interactions with other intermediate accounting instructors and students, we have developed a number
of new pedagogical features and content changes, designed both to help students learn more effectively and to
answer the changing needs of the course.
Evolving Issues
As we continue to strive to reflect the constant changes in the accounting environment, we have added a new fea-
ture to the Fifteenth Edition, Evolving Issues, which highlight and discuss areas in which the profession may be
encountering controversy or nearing resolution. Our hope is that these high-interest boxes will increase student
engagement, as well as serve as classroom discussion points. For another source of high-interest material, see the
What Do the Numbers Mean?boxes, most of which are new to this edition.
Demonstration Problems
We understand that students often struggle to apply accounting concepts to realistic business situations. As a
result, we include a new Demonstration Problembefore the end-of-chapter problem material, to serve as a model
to help students with their homework assignments.
Updated IFRS Insights Content
We have updated the end-of-chapter section, IFRS Insights, throughout the textbook. In addition, in the Relevant Facts
section, we now present Similaritiesas well as Differencesbetween GAAP and IFRS to increase student understanding.
Major Content Revisions
In response to the changing environment, we have significantly revised several chapters.
CChhaapptteerr 22 CCoonncceeppttuuaall FFrraammeewwoorrkk ffoorr FFiinnaanncciiaall RReeppoorrttiinngg
• New footnote material on the FASB’s additional guidance related to the use of fair value in financial statements.
• Updated discussion plus added an illustration on the five steps of revenue recognition.
• Revised Constraints section, as now only cost constraint is included in the conceptual framework.
CChhaapptteerr 44 IInnccoommee SSttaatteemmeenntt aanndd RReellaatteedd IInnffoorrmmaattiioonn
• Revised Format of the Income Statement section, adding discussion on the intermediate components of the
income statement and presenting the multiple-step before the single-step format to reflect current practice.
• Revised Reporting Irregular Items section, to broaden focus on irregular and unusual items. Updated discus-
sion throughout as well as added new material on noncontrolling interest.
• Updated Comprehensive Income discussion, to reflect the most recent accounting standards.
• New illustration showing and explaining the revised income statement sections.
CChhaapptteerr 1188 RReevveennuuee RReeccooggnniittiioonn
• We anticipate a new FASB ruling on the revenue recognition principle. As a result, please see the book’s
companion website, at www.wiley.com/college/kieso, for the latest information as well as the availability of
an updated, replacement chapter.
CChhaapptteerr 2233 SSttaatteemmeenntt ooff CCaasshh FFlloowwss
• Reorganized chapter, to present the indirect method through preparation of the statement of cash flows first,
followed by the discussion of the direct method as well as the advantages and disadvantages of both methods.
• New Evolving Issue, “Direct versus Indirect Controversy,” on the arguments in favor of each method.
See the next two pages for a complete list of content revisions by chapter.
vi