BAR: Business Analysis and Reporting

• Unit 01

  Unit 1: Business Analysis

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  105 questions · 7 topics
• Unit 02

  Unit 2: Technical Accounting and Reporting

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  119 questions · 8 topics
• Unit 03

  Unit 3: State and Local Governments (BAR-specific depth)

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  164 questions · 4 topics

A few questions from this module, with the answer and a full explanation. The complete bank is available when you start practising.

1. A government accountant needs guidance on a pension transaction. After reviewing GASB Statements and finding no directly applicable Statement, the accountant consults a GASB Implementation Guide Q&A. At which tier of the governmental GAAP hierarchy does this guidance sit?

   • A
     Level 5 — because implementation guides are non-authoritative practice aids only
   • B
     Level 2 — because it is AICPA literature cleared by GASB
   • C
     Level 4 — implementation guides (Q&As) published by GASB, below Statements, Technical Bulletins, and AICPA-cleared literature
     Correct answer
   • D
     Level 3 — because it is equivalent to a GASB Concepts Statement
   Explanation

   Under GASB Statement No. 55, GASB Implementation Guides (Q&As) occupy Level 4 of the governmental GAAP hierarchy, below Level 1 (GASB Statements and Interpretations), Level 2 (Technical Bulletins; AICPA guides cleared by GASB), and Level 3 (Concepts Statements; AICPA Practice Bulletins cleared by GASB; GASB EITF consensus positions). They are authoritative but carry less weight than higher-level standards.

2. Company A is a pharmaceutical company that licenses a drug compound (functional IP with significant standalone functionality) for $5,000,000 upfront plus a 3% royalty on net sales. The licence transfer occurs on 1 July Year 1. On 15 December Year 1, the licensee reports net sales of $2,000,000. When and how much revenue should Company A recognise for the licence and royalty?

   • A
     $5,000,000 at point of licence grant; royalty deferred until licence performance obligation is fully satisfied
   • B
     $5,000,000 over the licence term; $60,000 recognised when sales occur
   • C
     $5,000,000 recognised on 1 July Year 1 (point in time, right-to-use functional IP); $60,000 royalty recognised in December Year 1 when the underlying sales occur
     Correct answer
   • D
     $5,000,000 recognised when cash is received; $60,000 deferred until Year 2 reporting
   Explanation

   The drug compound is functional IP with significant standalone functionality (the customer can use the compound immediately without the licensor's ongoing involvement). Under ASC 606-10-55-58, a right-to-use licence is recognised at the point in time the licence is transferred — 1 July Year 1. Revenue = $5,000,000. For the royalty: under the sales-based royalty exception (ASC 606-10-55-65), revenue from royalties on licences of IP is deferred until the underlying sale occurs and the performance obligation is satisfied (or partially satisfied). Since the licence was transferred on 1 July Year 1 (fully satisfied) and sales of $2,000,000 occurred in December Year 1: royalty revenue = $2,000,000 × 3% = $60,000 recognised in December Year 1.

3. Under GASB Statement No. 65, how are debt issuance costs (other than prepaid insurance) treated by a governmental entity?

   • A
     Recorded as a reduction in the proceeds from debt issuance
   • B
     Deferred as an asset and amortised over the term of the debt
   • C
     Expensed as incurred in the period the debt is issued
     Correct answer
   • D
     Added to the face amount of the debt as part of the bond premium
   Explanation

   Under GASB 65, debt issuance costs (other than prepaid insurance) are recognised as an outflow of resources — expensed — in the period incurred. Pre-GASB 65 practice deferred these costs as assets. Under current GASB standards, there is no deferral; the costs flow through the Statement of Activities or are reported as an expenditure in governmental fund statements in the period the debt is issued.