Under GAAP, leases are classified as either operating leases or capital leases based on criteria such as transfer of ownership, bargain purchase options, and the lease term relative to the asset’s useful life. IFRS has different criteria and treatment for leases, focusing on a single lessee model where most leases are treated similarly to capital leases under GAAP.
The Matching Principle requires that expenses be recorded in the same period as the revenues they help to generate. This principle ensures that expenses are matched with related revenues in the income statement, providing a more accurate picture of profitability.
A contingent liability that is reasonably possible but not probable should be disclosed in the footnotes of the financial statements, not recognized as a liability on the balance sheet. Recognition is required only if the liability is both probable and can be reasonably estimated. Contingent liabilities that are not considered probable do not appear as line items on the balance sheet.
A patent is an intangible asset because it represents a legal right or privilege that does not have physical substance.
Under the lower of cost or market (LCM) rule, the market value of inventory is defined as the replacement cost, but it cannot exceed the net realizable value or be less than net realizable value less a normal profit margin. This ensures that inventory is not valued above what it could be sold for or below its cost.
