Page 19 - FINAL CFA I SLIDES JUNE 2019 DAY 7
P. 19
Session Unit 7:
24. Understanding Income Statements
LOS 24.e: Describe general principles of expense recognition, specific expense recognition
applications, and implications of expense recognition choices for financial analysis.
Amortisation Expense Recognition, p53
• Allocation of the cost of an intangible asset (e.g. franchise agreement) over its useful life.
• Most firms use the straight-line method to calculate annual amortization expense.
• Intangible assets with indefinite lives (e.g., goodwill) are not amortized. However, they
tanties
must be tested for impairment at least annually and expended accordingly.
Bad Debt Expense and Warranty Expense Recognition, p53
Matching principle requires the firm to estimate bad debt expense and/or warranty
expense; so it is recorded in period of sale, rather than a later period.
CFA Implications, p54
Like revenue recognition, expense recognition requires a number of estimates; it is possible for
firms to delay or accelerate it and manipulate earnings!
