RECEIVABLES Non-trade receivables

 Advances to or receivables from

Receivables
shareholders, directors, officers or
 Receivables are financial assets that
employees
represent a contractual right to receive cash
• Current assets– if collectible in one
or another financial asset from another
year.
entity.
• Non-current assets – if not collectible in
• Trade and non-trade receivables.
one year.
• Loans receivables – result from the
 Advances to affiliates – long-term
loans granted by banks and other
investments
financial institutions to customers.
 Advances to supplier – current assets
Trade and non-trade receivables  Subscription receivables
 Trade receivables – claims arising from the • Current assets – if collectible within one
sale of merchandise or services in the year.
ordinary course of business. • Deduction from share capital – if not
• Accounts receivables – open accounts collectible within one year.
not supported by promissory notes.  Creditors’ debit balances
• Notes receivables – supported by • Current assets – if material
formal promises to pay. • Offset against the creditors with credit
 Non-trade receivables – claims arising from balance – if not material
sources other than the sale of merchandise  Special deposits on contract bids
or services. • Current assets – currently collectible.

Classification of receivables • Non-current assets – if silent.

 Trade receivables which are expected to be  Accrued income – current assets

realized in cash within one year or the  Claims receivable – current assets

normal operating cycle whichever is long is Presentation of receivables

current.  Trade receivables and non-trade
 Non-trade receivables which are expected receivables which are currently collectible
to be realized in cash within one year the shall be presented on the face of the
length of the operating cycle statements of financial position as one line
notwithstanding is current. item under trade and other receivables.
 Non-trade receivables collectible beyond  The detail of the total trade and other
one year is non-current. receivables shall be disclosed in the notes
 to the financial statements.
  Subsequent measurement – accounts
Customers’ credit balance receivable shall be measured at amortized
 Customers’ credit balance are credit cost.
balances in accounts receivable resulting • Amortized cost – net realizable value.
from overpayments, returns and  Net realizable value – amount of
allowances, and advance payments from cash expected to be collected or
customers. the estimated recoverable amount.
• Current liability – if material. Net realizable value
• Offset against the customers with debit  Assets shall not be carried at above their
balance – if not material. recoverable amount. Adjustments to trade
Initial measurement accounts receivable:
 Financial asset shall be recognized initially • Allowance for freight charge
at fair value plus transaction costs that are • Allowance for sales return
directly attributable to the acquisition. • Allowance for discount
• Fair value is equal to transaction price • Allowance for doubtful accounts
(fair value of the consideration given). Freight charges
Initial measurement  FOB destination – ownership of goods
• Short-term receivables – fair value is purchased is vested in the buyer upon
equal to the face amount or original receipt freight is paid by seller.
invoice amount.  FOB shipping – ownership of goods
• Long-term receivables purchased is vested in the buyer upon
 Interest-bearing – fair value is equal shipment freight is paid by the buyer.
to face value.
 Freight collect – freight charge is actually
 Noninterest-bearing – fair value is paid by the buyer.
equal to the present value of all  Freight prepaid – freight charge is already
future cash flows discounted using paid by the seller.
the prevailing market rate of interest
Sales returns and discounts
for similar receivables.
 Sales returns – customers will return goods
Subsequent measurement that are unsatisfactory or will make claims
 Accounts receivable shall be measured requiring reduction in the amount due as in
initially at face value or original invoice the case of shipment shortages and
amount. defects.
 Sales discounts – cash discount is a
reduction from an invoice price by reason of
prompt payment.
• Seller – sales discount
• Buyer – purchase discount  Aging of accounts receivable
• It involves an analysis where the
accounts are classified as not due or
Method of recording credit sales past due and the allowance is
 Gross method – the accounts receivable determined by multiplying the total of
and sales are both recorded at gross each classification by the rate
amount of the invoice. experienced by each category.
 Net method – the accounts receivable and  Advantage – considered as more
sales are recorded at net amount of the accurate and scientific computation
invoice (price minus cash discount). of the allowance for doubtful
accounts.
Method of recording credit sales
 Disadvantage – it violates the
 Bad debts
matching process.
• Bad debts refer to the amount of credit
 Percent of accounts receivable
sales that may become uncollectible.
• A certain rate is multiplied to the open
 Allowance method – requires the
accounts at the end of the period to get
recognition of bad debts loss if the
the required allowance.
accounts are doubtful of collection.
 Advantage – it is simple to apply
 Direct write off method – requires
and it properly presents accounts
the recognition of bad debts loss
receivable at estimated net
only when the account is proved to
realizable value.
be worthless or uncollectible.
 Disadvantage – it violates the
 Recoveries of accounts written off
principle of matching costs against
• When collected – recharge the
revenue and the loss experience
customer’s account with the amount
rate may be difficult to obtain and
collected and possibly with the entire
may not be reliable.
amount previously charged off if it is
 Percent of sales
expected to be received in full.
• The amount of sales for the year is
 Allowance for bad debts
multiplied by a certain rate to determine
the doubtful accounts expense.
  Advantage – there is proper  This includes a reclassification from notes
matching of cost against revenue. receivable to accounts receivable with
 Disadvantage – accounts interests and charges.
receivable may not be shown at Accounts receivable 000
estimated realizable value because Notes receivable 000
the allowance may be excessive or Interest income 000
inadequate.

 Correction of doubtful accounts

• The percentage of sales has the Initial measurement
disadvantage of determining the  Short-term notes receivable – face
adequacy of the allowance account. value since the effect of discounting is
• Ageing of the accounts is necessary to usually not material.
test the reasonableness of the  Long-term notes receivable
allowance.  Interest-bearing – face value
• The difference is reported in the income which is usually the present value
statement as an adjustment to the upon issuance.
doubtful accounts expense.  Noninterest-bearing – present
value which is the discounted
NOTES RECEIVABLES value.
Notes receivable Subsequent measurement
 Notes receivable are claims supported by  Interest-bearing long-term notes
formal promises to pay usually in the form receivable – amortized cost using effective
of notes. interest method.
• Negotiable promissory note is an  Noninterest-bearing long-term notes
unconditional promise in writing made receivable
by one person to another, signed by the  Present value plus the interest income
maker, engaging to pay on demand or (amortization of discount on notes
at a fixed determinable future time a receivable).
sum certain in money to order or to  Face value minus the balance of the
bearer. discount on notes receivable.
Dishonored notes Loan receivable
 Dishonored notes are promissory notes that
matures, and it not paid.
  Loan receivable is a financial asset arising processing documents and closing the
from a loan granted by a bank or other loan transaction.
financial institution to a borrower or client. Accounting for origination fees
 The term of the loan may be short term,  Origination fees received from the
but the repayment may cover several borrower – unearned interest income and
years. amortized over the term of the loan.
Initial measurement  Origination fees not chargeable against
 Initial recognition – fair value (transaction the borrower – direct origination cost are
price, amount of the loan granted) plus deferred and amortized over the term of
transaction costs that are directly the loan.
attributable to the acquisition of the loan.  Preferably, offset directly against any
 Transaction costs unearned origination fees received.
 Direct origination cost – added. Accounting for origination fees
 Indirect origination cost – outright  If the origination fees received exceed the
expense. direct origination costs – unearned interest
 Origination fees received – income and the amortization increased
deducted. interest income.
Subsequent measurement  If the direct origination costs exceed the
 Subsequent measurement – amortized origination fees received – charged to
cost using the effective interest method. direct origination costs and the
 If initial measurement is lower than amortization decreases interest income.
principal amount – difference is added Presentation
to carrying amount.  The loan receivable is measured and
 If initial measurement is higher than presented at amortized cost.
principal amount – difference is  Face value of the loan net of unearned
deducted from carrying amount. interest income.
Origination fees
RECEIVABLES FINANCING
 Origination fees – fees charged by the
bank against the borrower for the creation Receivable financing
of the loan.  Receivable financing is the financial
 Evaluating the borrower’s financial flexibility or capability of an entity to raise
condition, evaluating guarantees, money out of its receivables.
collateral and other security, negotiating  Forms of accounts receivable financing –
the terms of the loan, preparing and pledging, assignment, and factoring.
  Form of notes receivable financing – to a lender (assignee) in consideration
discounting. of a loan.
• Assignment – specific accounts
Pledging
receivable.
 Pledging of accounts receivable – when
• Pledging – all accounts
loans are obtained from the bank or any
receivable.
lending institution, the accounts receivable
 It is evidenced by a financing agreement
may be pledged as collateral security for
and a promissory note.
the payment of the loan.
 The borrowing entity continues to collect Features of assignment
the pledged accounts receivable but may  Notification basis – customers are
be required to turn over the collections to notified to make the payments direct to
the bank in satisfaction of the loan. the assignee (lender).
 Non-notification basis – customers are
Pledging
not informed that their accounts have
 Loan recording:
been assigned.
Cash xx
 The assignee (lender) analyzes the
Discount on loan payable xx
assignor’s (borrowers) accounts
Loan payable xx
receivable before the assignment.
 Subsequent payment:
 The assignee charges interest, service
Loan payable xx
or finance charge or commission for the
Cash xx
loan.
Financial statement presentation
Financial statement presentation
 Disclosure is made in the notes to the
 The details of the assigned receivables
financial statements.
is presented in the notes to the financial
 The carrying amount of the note payable
statements as part of the trade and
is shown net of discount on note
other receivables.
payable.
 The disclosure shall include its equity in
 The discount on note payable is
the assigned accounts receivable (Value
amortized using the straight-line
of the assigned receivable less the
method.
carrying amount of the note payable).
Assignment
Factoring
 Assignment – the borrower (assignor or
 Factoring – the borrower entity sell the
owner of the receivable) transfer its
accounts receivable without recourse
rights in some of its accounts receivable
and notification basis to a factor.
 • Factoring – transfers ownership  Discounting – the process obtaining
of the receivables. cash from the note receivable prior to
• Assignment – retains ownership the maturity date at discounted
of the receivables. amounted at a bank or other financial
 Gain or loss is recognized for the institution.
difference between the proceeds and • Maturity date is the date on which
the net carrying amount of the the note should be collected or
receivables. paid.

Types of factoring Types of discounting

 Casual factoring – an entity is forced to  To discount the note, the payee must
factor some or all of its receivables at a endorse it. The payee is the endorser,
substantial discount to obtain the much and the bank is the endorsee.
needed cash. • Endorsement with recourse (if
 Factoring as a continuing agreement – a silent) – endorser (payee) shall
finance entity purchases all the accounts pay the endorsee if the maker
receivable of an entity. dishonors the note (contingent
liability of the endorser).
Features of casual factoring
• Endorsement without recourse –
 Selling entity secures credit approval
endorser avoids future liability
from the factor.
even if the maker refuses to pay
 The factor assumed credit and collection
the endorsee at maturity date.
function.
 Factor charges a commission or Discounting of notes receivable
factoring fee for credit approval, billing,  Maturity value (carrying amount) of the
collecting, and assuming uncollectible note is equal to the principal value plus
factored accounts. interest.
 Factor’s holdback (current asset) –  Discount is equal to maturity value times
predetermined amount as protection discount rate and discount time.
against customer returns, allowances • Discount time is the remaining
and other adjustments. term of the note.
 Net proceeds is maturity value less
Discounting of notes receivable
discount.
 Parties to a note receivable:
 Gain or loss on discounting is the
• Maker – liable to pay the note.
difference between the net proceeds
• Payee – entitled to receive
and carrying amount.
payment on maturity.
With recourse – conditional sale If net proceeds > carrying amount = Gain on
 Conditional sale – the note receivable is discounting
recognized as a contingent liability If net proceeds < carrying amount = Loss on
 The note receivable discounted is discounting
deducted from the total notes receivable Without recourse – Note receivable discounted
with disclosure.
• Paid by maker on maturity – IMPAIRMENT OF RECEIVABLES
contingent liability is extinguished
and credited to note receivable. Impairment of receivables
• Dishonored by maker – the  Impaired accounts receivable – these
receivable is paid and contingent are accounts receivable that are
liability is extinguished. considered as uncollectible.
 PFRS 9, paragraph 5.5.1, an entity shall
recognize a loss allowance for expected
With recourse – secured borrowing credit losses on financial asset
 Secured borrowing – note receivable is measured at amortized cost.
not derecognized but an accounting • Measurement – equal to the
liability (liability for note receivable lifetime expected credit loss if the
discounted) is recorded equal to its face credit risk on the financial
value. instrument has increased
 The gain or loss is treated as either significantly since initial
interest income or interest expense. recognition.
• Paid by maker on maturity – Impairment of receivables
liability is extinguished and  Probability weighted outcome –
credited to note receivable. possibility that a credit loss occurs and
• Dishonored by maker – the that the possibility that no credit loss
receivable is paid and liability is occurs.
extinguished.  Time value of money – expected credit
Journal entry losses are discounted or equal to the
present value of all cash shortfalls.
Cash (Net proceeds)
 Reasonable and supportable information
Gain or loss (Net proceeds less carrying
that is available without undue cost or
amount)
effort.
Notes receivable (Principal amount)*
Interest income
Impairment assessment for accounts Steps in computing impairment loss
receivable  Compute the present value (based on
 Individual significant accounts the original effective interest) of the total
receivable should be considered for future cash flows.
impairment separately and if impaired,  Determine the amount of impairment
recognize the impairment loss. loss:
 Accounts receivable not individually • Carrying amount of the loan less
significant should be collectively present value of the total future
assessed for impairment. cash flows.
 Accounts receivable not considered  Prepare the journal entries.
impaired should be included with other
accounts receivable with similar credit-
risk characteristics and collectively
assessed for impairment.

Steps in computing impairment loss

 Determine the portion of the total
accounts receivable as: impaired
(uncollectible) and other accounts
receivable (collectible).
 Compute the total impairment loss:
• Impaired accounts receivable
• Composite rate multiplied to the
other accounts receivable
 Prepare journal entries.

Impairment for loans receivable

 Measurement – difference between the
carrying amount and the present value
of estimated future cash flows
discounted at the original effective rate.
• The carrying amount of the loans
receivable shall be reduced either
directly or through the use of an
allowance account.