Accountant interview questions

Contract costs are capitalized only when the revenue guidance identifies a recoverable asset rather than a current-period selling or operating cost.

• An incremental cost of obtaining a contract, such as a commission payable only on a successful sale, is capitalized when recovery is expected.
• A fulfillment cost outside another standard is capitalized when it relates directly to a contract, creates or enhances a resource for future performance, and is expected to be recovered.
• The asset is amortized in the pattern of the related goods or services and tested for impairment when expected consideration no longer covers remaining costs.
• A practical expedient permits immediate expense of qualifying acquisition costs when the expected amortization period is one year or less.

An assurance warranty is a cost provision, while a service warranty is a separate performance obligation.

• Assurance coverage only promises that the delivered product complies with agreed specifications, so expected repair cost follows the applicable warranty or provision guidance.
• A warranty sold separately normally provides a distinct service, so part of the transaction price is allocated to it and recognized over the coverage period.
• For a combined warranty, the entity separates the service component when it can estimate it reasonably; otherwise the combined promise is treated as a service obligation.

License revenue is recognized over time when the customer receives access to intellectual property that the licensor continues to support or change, and otherwise generally at the point control transfers.

• A right-to-access license requires ongoing activities that significantly affect the intellectual property and expose the customer to the effects without transferring another good or service.
• A right-to-use license gives the customer the existing functionality at the grant date, so revenue cannot precede the date the customer can use and benefit from it.
• Sales-based or usage-based royalties promised for an intellectual-property license remain subject to the royalty exception and are recognized when the later sales or usage occur.

A customer option creates a performance obligation when it gives a discount or benefit the customer would not receive without the current contract.

• The assessment compares the option price with the normal standalone price after considering discounts available to the same class of customer.
• The standalone selling price of the material right reflects the incremental discount and the probability that the customer will exercise the option.
• Allocated revenue is deferred until the future goods or services transfer or the option expires, while an option at normal market terms creates no separate obligation.

Consideration is allocated between lease and nonlease components using relative standalone prices unless a permitted practical expedient is elected.

• A lease component conveys use of an identified asset, while maintenance, security, or other services are nonlease components accounted for under their relevant guidance.
• Observable standalone prices are used when available; otherwise the entity estimates them from market or cost information.
• Lessees may elect by asset class to combine qualifying nonlease components with the associated lease component, which usually increases the recorded lease balance.

Both frameworks permit a short-term lease exemption, while IFRS 16 also provides a separate exemption for leases of low-value assets.

• The short-term election applies by asset class when the lease term at commencement is 12 months or less and contains no reasonably certain purchase option.
• IFRS 16 assesses low value from the value of the underlying asset when new and allows the election lease by lease; ASC 842 has no equivalent exemption.
• Exempt lease payments are generally expensed straight-line over the lease term, with variable payments recognized when the triggering event occurs.

ASC 842 derives one generally straight-line operating lease expense by making right-of-use asset amortization the balancing amount after interest on the liability.

• The liability grows by the effective interest amount and falls for cash payments, just as it does for a finance lease.
• The right-of-use asset reduction equals the single lease expense minus the liability accretion, subject to impairment and other adjustments.
• The income statement presents one operating lease cost, unlike the separate interest and amortization pattern for an ASC 842 finance lease or most IFRS 16 leases.

Lessor classification depends on whether the arrangement transfers control or substantially all economic risks and rewards of the underlying asset.

• Under ASC 842, meeting a finance-lease transfer criterion generally produces a sales-type lease, subject to collectibility and other recognition requirements.
• A lease that misses those criteria can be direct financing when the present value and residual-value tests are met, often with third-party residual value support.
• Remaining leases are operating leases, while IFRS 16 uses finance or operating classification based on transfer of substantially all risks and rewards.

A constructive obligation arises when an entity's established conduct creates a valid expectation that it will accept a responsibility even without a legal duty.

• The expectation must come from a sufficiently specific published policy, past practice, or current statement communicated to affected parties.
• Management intent or an internal plan alone is not a present obligation because the entity can still change course without an external expectation.
• US GAAP does not apply one broad constructive-obligation model, so recognition normally depends on topic-specific guidance or a legally enforceable obligation.

IAS 37 recognizes a provision when the unavoidable cost of meeting a contract exceeds the economic benefits expected from it, while US GAAP relies mainly on contract-specific guidance.

• Unavoidable cost is the lower of the direct cost of fulfillment and the compensation or penalties for failing to fulfill the contract.
• Assets dedicated to the contract are tested for impairment before a separate onerous-contract provision is recorded.
• US GAAP has no general loss provision for every executory contract, so leases, purchase commitments, and other arrangements follow their applicable literature.

The obligation is measured independently, and a separate recovery asset is recognized only when receipt meets the applicable high recognition threshold.

• Under IAS 37, a reimbursement asset is recognized when recovery is virtually certain and cannot exceed the related provision.
• A probable but not virtually certain contingent asset is disclosed when material rather than netted against the liability.
• US GAAP generally avoids recognizing gain contingencies before realization or the relevant topic's recognition criteria are met, even when the related loss is accrued.

IFRS permits reversal for many nonfinancial assets when recoverable amount improves, while US GAAP generally prohibits reversal for long-lived assets held for use.

• An IFRS reversal is limited to the carrying amount that would have existed after normal depreciation or amortization had no impairment been recorded.
• Goodwill impairment is never reversed under either framework, even when the acquired business later recovers.
• Assets held for sale can reflect later increases in fair value less costs to sell, but only within the limits of the applicable prior write-down rules.

An indefinite-lived intangible is tested at least annually without amortization, while a finite-lived intangible is amortized and tested when impairment indicators arise.

• US GAAP generally compares an indefinite-lived intangible's fair value directly with its carrying amount, with an optional qualitative assessment first.
• Under IAS 36, the asset is tested individually when it generates independent cash inflows and otherwise within its cash-generating unit using recoverable amount.
• A change from indefinite to finite life is applied prospectively, after testing the asset for impairment before amortization begins.

A qualifying held-for-sale asset is measured at the lower of carrying amount and fair value less costs to sell, and depreciation stops.

• Classification requires availability for immediate sale in present condition and a highly probable sale plan that is normally expected to complete within one year.
• Any write-down is recognized in earnings, and later recovery is limited by the cumulative loss previously recognized under the applicable guidance.
• The asset or disposal group is presented separately when required, while liabilities included in a disposal group remain separately identified.

A nonmonetary item keeps a historical exchange rate when carried at historical cost and uses the valuation-date rate when carried at a current value.

• Prepayments, fixed assets, inventory, and equity recorded at historical cost are not retranslated at each closing rate.
• A nonmonetary item measured at fair value is translated using the rate on the date that fair value was determined.
• The exchange component follows the underlying valuation gain or loss into profit or loss or other comprehensive income rather than being classified separately by default.

The cumulative translation adjustment is reclassified from equity when the disposal causes the reporting entity to lose control, significant influence, or joint control over the foreign operation as applicable.

• A full disposal generally releases the accumulated amount attributable to the parent into the disposal gain or loss.
• A partial sale that retains control is an equity transaction, so the relevant translation balance is reattributed between the parent and noncontrolling interest rather than recognized in earnings.
• The calculation must also address amounts previously attributed to noncontrolling interest and any retained investment under the governing framework.

Advance consideration normally fixes a historical rate when the nonmonetary prepayment or deferred-income balance is first recognized.

• Under IFRIC 22, the transaction date is the date the entity initially recognizes the nonmonetary asset or liability arising from the advance.
• Multiple advance payments establish multiple transaction dates and rates for the corresponding portions of the later asset, expense, or revenue.
• Any remaining monetary receivable or payable is retranslated at the closing rate, unlike the historical-rate advance balance.

Graded-vesting awards are attributed by tranche under IFRS 2, while ASC 718 can permit a policy election for certain service-only awards.

• IFRS treats each vesting tranche as a separate award with its own vesting period, which usually accelerates expense into earlier years.
• US GAAP permits tranche attribution and can permit straight-line attribution over the requisite service period when only service conditions apply.
• Under a straight-line US GAAP policy, recognized cost at any date cannot be less than the grant-date fair value of awards already vested.

Forfeitures change the number of awards included in compensation cost, but the permitted estimation approach differs between the frameworks.

• ASC 718 allows an entity-wide policy election to estimate forfeitures or account for them when they occur, applied consistently to similar awards.
• IFRS 2 requires an estimate for service and nonmarket performance conditions and true-ups to the number of awards that ultimately vest.
• Failure of a market condition does not reverse cost when the employee completed the required service because that condition was included in grant-date fair value.

A beneficial modification adds incremental compensation cost, while an unfavorable change normally cannot reduce the original grant-date cost.

• Incremental value is generally the excess of the modified award's fair value over the original award's fair value immediately before modification.
• Cancellation by the entity generally accelerates recognition of the remaining cost because it is treated as an accelerated vesting event.
• Cash paid on cancellation is treated as a repurchase of equity up to the award's fair value, with any excess recognized as additional compensation expense.