GAAP Review Series - Part 3

• Chapter 1 - Accounting for Research and Development Activities and for Computer Software
  • Learning Objectives
  • Introduction
  • Computer Software
  • Module 1 – Research and Development Costs
    • What Constitutes a Research and Development Activity
    • Accounting for Research and Development Activities
    • Disclosure Requirements
    • Financial Statement Illustrations
  • Module 2 – Research and Development Arrangements
    • Accounting for Research and Development Arrangements
    • Disclosure Requirements
    • Financial Statement Illustration
  • Module 3 – Computer Software
    • Accounting for Internally Developed Computer Software
    • Accounting for Purchased Computer Software
    • Disclosure Requirements
  • Module 4 – Case Studies
    • Case 1-1 – Research and Development Costs
    • Case 1-2 – Software Development Costs
    • Case 1-3 – Software Development Costs
• Chapter 2 - Share-Based Payment
  • Learning Objectives
  • Introduction
  • FASB ASC 718, Compensation – Stock Compensation [SFAS No. 123(R)]
  • Module 1 – FASB ASC 718, Compensation–Stock Compensation [SFAS No. 123(R)]
    • Fair Value Is the Appropriate Measurement Criterion
    • Accounting for Share-Based Payment Transactions with Employees
    • Employee Share Purchase Plans
    • Measurement of Awards Classified as Equity
    • Recognition of Compensation Cost for an Award Accounted for as an Equity Instrument
    • Recognition of Changes in the Fair Value or Intrinsic Value of Awards Classified as Liabilities
    • Modifications of Awards of Equity Instruments
    • Accounting for Tax Effects
    • Earnings per Share Implications
    • Required Disclosures
  • Module 2 – FSPs for Share-Based Payments
    • FSP FAS 123(R)-1
    • FSP FAS 123(R)-2
    • FSP FAS 123(R)-3
    • FSP FAS 123(R)-4
    • FSP FAS 123(R)-5
    • FSP FAS 123(R)-6
• Chapter 3 - Pension Plans and Related Benefits
  • Learning Objectives
  • Introduction
  • Module 1 – Accounting for Pension Plans
    • Defined Contribution Plan
    • Defined Benefit Pension Plan
  • Module 2 – Computation of Pension Cost for Defined Benefit Plans
    • Service Cost
    • Interest Cost
    • Actual Return on Plan Assets
    • Amortization of Unrecognized Prior Service Cost
    • Actuarial Gain or Loss, if Recognized
  • Module 3 – Required Disclosures for Defined Benefit and Defined Other Postretirement Plans
  • Module 4 – Attribution Methods
  • Module 5 – Technical Illustrations for Single Employer Plans
  • Module 6 – Disclosure Requirements for Defined Benefit and Defined Contribution Pension Plans
    • Defined Benefit Plans
    • Defined Contribution Plans
    • Financial Statement Illustrations
  • Module 7 – Miscellaneous Pension Plans
    • Multiemployer Pension Plan
    • Multiple-Employer Pension Plan
    • Non-U.S. Pension Plans
    • Pension Plans under Insurance Contracts
  • Module 8 – Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
    • Definition and Examples of Settlements and Curtailments
  • Module 9 – Accounting for Termination Benefits
    • Special Termination Benefits
    • Contractual Termination Benefits
  • Module 10 – Case Studies
    • Case 3-1 – Computation of Pension Cost
    • Case 3-2 – Pension Plan Termination
• Chapter 4 - Postretirement and Postemployment Benefits
  • Learning Objectives
  • Introduction
  • Applicability of FASB ASC 712 (SFAS No. 106)
  • Module 1 – Defined Contribution Postretirement Plans
  • Module 2 – Defined Benefit Postretirement Plans
    • Six Components of Defined Benefit Postretirement Benefit Costs
  • Module 3 – Recording Assets and Liabilities
  • Module 4 – Assumptions and Attribution Methods
  • Module 5 – Technical Illustration of Defined Benefit Plan
  • Module 6 – Disclosure Requirements for Postretirement Benefit Plans
    • Financial Statement Illustrations
  • Module 7 – Other Types of Postretirement Benefit Plans
    • Multiemployer Plan
    • Multiple-Employer Plan
    • Non-U.S. Plans
    • Plans under Insurance Contracts
  • Module 8 – Accounting for Settlements and Curtailments of Defined Benefit Postretirement Plans . 4-39 Definition of Settlements and Curtailments
    • Computation of Gains or Losses on Settlements
  • Module 9 – Accounting for Termination Benefits
  • Module 10 – Accounting for Postemployment Benefits
    • Criteria for Accrual of Compensated Absence and Postemployment Benefit Expense
    • Measurement of Accrued Compensation Expense
    • Postemployment Benefits Not Meeting the Criteria for Accrual
    • Implementation Guidelines
  • Module 11 – FASB Staff Position Related to Postretirement Benefit Plans
    • FASB Staff Position No. FAS 106-2
  • Module 12 – Case Studies
    • Case 4-1 – Amortization of Transition Obligation
    • Case 4-2 – Computation of Net Periodic Benefit Cost
    • Case 4-3 – Reconciliation of Funded Status
    • Case 4-4 – Benefit Plan Termination
• Chapter 5 - Latest Developments

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Chapter 1 - Accounting for Research and Development Activities and for Computer Software

Learning Objectives

After completing this chapter you will be able to

• Understand the guidance in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 730, Research and Development (SFAS No. 2).

• Identify research and development activities and determine whether research and development costs should be expensed or capitalized.

• Account for research and development arrangements in which a company receives funding or loans and advances funds for the research activity.

• Classify and measure computer software costs.

• Determine the amount of software revenue to be recognized.

• Understand the impact of computer software costs on financial reports.

Introduction

Research and Development

FASB ASC 730, Research and Development (SFAS No. 2), applies to all companies that incur research and development costs, but it does not apply to the following:

• Research and development activities that are performed for other entities under contract

• Indirect costs that are reimbursable under a contract

• Unique activities in the extractive industries, such as prospecting and drilling

Research and Development Arrangements

FASB ASC 730 (SFAS No. 2) also applies to all companies that are parties to research and development arrangements in which funding is provided in total or in part by other entities. The actual research may be performed by the entity itself, unrelated entities, or by the entities funding the research. The guidance does not apply to research and development arrangements sponsored by a governmental agency.

Computer Software

FASB ASC 985, Software (SFAS No. 86), applies to all companies that develop or purchase computer software for the purpose of leasing, selling, or marketing in some form to other entities. The software may be marketed either as a separate product or as part of a product or process. This guidance does not apply to the following items:

• Computer software for internal use

• Computer software developed for others under a contractual arrangement

Module 1 – Research and Development Costs

FASB ASC 730, Research and Development (SFAS No. 2), provides generally accepted accounting principles for the proper accounting of research and development costs. The statement defines research and development and specifies what activities should be classified as research and development activities. In addition, the statement specifies when the cost of a research and development activity should be expensed and when it should be capitalized and amortized.

Note that this guidance does not apply to R&D activities performed for other entities under contract, indirect costs that are reimbursable under contract, or prospecting and drilling activities of natural resource extraction companies.

What Constitutes a Research and Development Activity

The definitions of research and development are critical because costs related to these activities generally must be expensed and they must be disclosed separately in the financial statements if material in amount. Other similar costs, e.g., many types of administrative activities, may be capitalized if they meet satisfy the definition of an asset.

The glossary to the FASB ASC defines Research and Development as follows:

Research is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service (referred to as product) or a new process or technique (referred to as process) or in bringing about a significant improvement to an existing product or process.

Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use. It includes the conceptual formulation, design, and testing of product alternatives, construction of prototypes, and operation of pilot plants. Examples of research and development activities are efforts to discover new knowledge through laboratory research; preproduction prototypes design, construction, and testing; and product or process alternative test and/or evaluation.

Examples of activities not considered research and development are tool, jig, mold, and die design on a routine basis; existing product design changes that is seasonal or periodic; troubleshooting related to breakdowns during commercial production; and market research and testing.

Accounting for Research and Development Activities

Costs classified as research and development are expensed in the accounting period incurred. However, it may be difficult to determine when a cost is research and development. Listed below are examples of when selected costs are considered research and development costs:

• Expensed as Research and Development in Accounting Period Incurred

– Material and equipment with no alternative use

– Salaries and wages

– Intangible asset purchased from others with no alternative use

– Contract services provided by outside entities

– Reasonable allocation of overhead costs

• Capitalized and Amortized to Research and Development

– Material and equipment with an alternative use

– Intangibles purchased from others with an alternative use

If the asset has an alternative future use, the item is capitalized and the amortization or depreciation recognized as research and development costs.

If research and development activities are ongoing when a business combination is consummated using the acquisition method, an acquirer recognizes all tangible and intangible research and development assets acquired in the business combination. Prior guidance required an acquirer to measure and immediately expense tangible and intangible assets to be used in research and development that had no alternative future use. A research and development asset was recognized as such only if it had an alternative future use.

Disclosure Requirements

The total amount of research and development costs charged to income should be disclosed for each accounting period that an income statement is prepared.

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