Intermediate Accounting

here are three main types of accounting: financial, managerial and intermediate. While all three
are interchangeable, intermediate accounting focuses on some of the more challenging
transactions. We will explore those transactions as they relate to auditing.
 Lesson
 
 Quiz
 
 Course
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What is Intermediate Accounting?

XYZ Corporation is undergoing an external audit. The auditor, Alyssa, is reviewing financial
aspects of intermediate accounting, which explores the accounting concepts, strategies and
policies of business transactions.
This is Alyssa's first independent audit after passing the Certified Internal Audit exam. Today,
she will focus on four important topics as it relates to auditing: leases, intangible assets, bonds,
and pensions. Let's define the four terms and the discuss each in depth.

Leases
Alyssa starts by analyzing leases. A lease is an agreement between two or more parties that
identify the rights, obligations and time frame of the agreement. She interviews XYZ's
accountant in charge of leasing and asks him to discuss the benefits and any challenges.
The accountant notes that leasing provides minimal initial cash outlay, maintenance is typically
included in the contract, and lease payments can be deducted as an expense for tax purposes on
the income statement.
He then explains that a major drawback. XYZ has a one million dollar piece of leased
equipment, the contract ends next month and after a lengthy term, and they will not own the
equipment. Additionally, he's working on an analysis that may show that buying the equipment
would have been cheaper.
Alyssa thanks him for his perspective and begins reviewing their leasing contracts and
transactions. Afterwards, she meets with another accountant to discuss intangible assets.

Intangible assets
Intangible assets are assets that do not have physical characteristics. Examples include patents,
copyrights, trademarks, brand recognition and research and development. XYZ corporation has
many well-known subsidiaries with all of these, but Alyssa will focus on research and
development today.
Research and development is the expense a company undertakes to create a new product. That
expense must be turned into an intangible asset until the physical asset, the product, has been
created.
Three conditions must exist to identify research and development as an intangible asset. Alyssa
combs through hundreds of pages of documents and transactions to determine if:

 the product will yield a future benefit

 the company has complete control over the creation
 substantial wages and expenses have been incurred

These conditions are based on the International Accounting Standards that state that intangible
assets are recognizable when an economic benefit can be derived and costs are measurable.
Alyssa reviews the company's balance sheet to see that they have accounted for their intangible
assets accurately. Now she moves on to bonds.

Bonds
Bonds are a contractual arrangement, similar to an IOU, whereby investors lend money to XYZ
with a promise of repayment sometime in the future. The investors are incentivized by quarterly
interest payments until repayment.
Alyssa schedules a meeting with the company's bond manager to discuss how well the company
is managing the sale and maintenance of bonds. The bond manager explains that the company
has purchased large assets with cash from bond sales. Since their credit rating is superior, the
demand for their bonds are solid.
The biggest advantage of selling bonds is the fact that investors do not expect repayment until
20-30 years. However, one of the drawbacks is ensuring that the assets purchased with bond
money generate enough revenue to make quarterly interest payments and pay back the principle.