RECEIVABLES

PROF. ARJAY C. MENDOZA, CPA,

MMBM
MAY 2023
LEARNING OBJECTIVES
 Understand the nature of receivables as a financial asset
 Enumerate and describe the specific accounts that are
classified under receivables
 Know the requirements for the measurement and financial
statement presentation of short-term and long-term
receivables;
 Measure the net realizable value of receivables;
 Understand the basic disclosures needed for trade and other
receivables;
 Compute for the present value of notes receivables; and
 Prepare an amortization table for notes receivable.
RECEIVABLES
WHAT IS RECEIVABLES?
RECEIVABLES as financial assets, represent a
contractual right to receive cash or other financial
assets from another entity. It is presented under the
CURRENT ASSETS section in the Statement of
Financial Position under the heading “Trade and
Other Receivables”. It is recognized due to the
accrual assumption in accounting, whereas
business entities are allowed to recognize income
when goods are sold or when services have been
rendered, not necessarily when cash is received.
WHAT IS RECEIVABLES?
TRADE RECEIVABLES are comprised of accounts
receivables and notes receivables. These are the
usual receivables that arise from the ordinary
course of business operation.

However, receivables may not only arise from the

sale of goods or rendering of services. They may
also come from other sources, which are called
non-trade receivables.
EXAMPLES OF NON TRADE
RECEIVABLES
1. CLAIMS RECEIVABLES

2. INTEREST RECEIVABLES

3. ADVANCES TO AFFLIATES/ IOUs FROM

OFFICERS and EMPLOYEES
 “CREDIT IS GOOD, BUT WE
NEED CASH”

Business establishments that still

continue to sell purely on cash basis may
find themselves lagging in the race to get
public patronage.
ACCOUNTS RECEIVABLES
These are essentially short-term receivables that
arise from the ordinary course of business
operations. When a merchandiser sells goods on
credit, he/she recognizes account receivable in
his/her books. The credit term or agreement is
considered an open account, which means no
formal written promise to pay or promissory note is
required of the customer-debtor.

Sample terms: 3/10, n/30

2/15, n30
INITIAL RECOGNITION
According to paragraph 5.1.1 of PFRS 9:
FINANCIAL INSTRUMENTS, “Financial assets such
as receivables are recognized at face value, plus
transaction costs that are directly attributable to
the acquisition.”

Measuring the fair value of a receivable is

straightforward because accounts receivable are
initially recorded at face value.
SUBSEQUENT RECOGNITION
At the end of a reporting period, accounts
receivable are reported at their NET REALIZABLE
VALUE. This means that they are no longer carried
at their initial face value but at an amount expected
to be collected from them through an adjustment
that recognizes probable loss.

The accounting process of anticipating probable

loss on receivables is supported by the principle of
PRUDENCE.
DERECOGNITION
According to paragraph 3.2.3 of PFRS 9, a financial
asset such as an account receivable is
DERECOGNIZED or REMOVED from the books, when
either of the two occurs:

1. The contractual rights to the cash flow expire

2. The entity transfers the receivables, and the
transfer qualifies for derecognition.
NET REALIZABLE VALUE (NRV)
At the end of the year, an entity assesses or
estimates the amount that could be eventually
collected from its customers’ accounts. The
estimated amount is the receivable’s NET
REALIZABLE VALUE (NRV).

It is the difference between the gross receivables

and the allowance for doubtful accounts at the end
of reporting period. Allowance for doubtful accounts
is a “contra-receivable” (deduction from receivable)
account.
NET REALIZABLE VALUE (NRV)
Other factors that would affect the NRV of the
accounts receivables are sales discounts,
sales returns and allowances.
METHODS OF ESTIMATING LOSS ON A/R
A. THE ALLOWANCE FOR DOUBTFUL ACCOUNTS IS
UPDATED BY PERCENTAGE OF ACCOUNTS
RECEIVABLES

B. AGING OF ACCOUNTS RECEIVABLES

C. PERCENTAGE OF SALES METHOD

ALLOWANCE FOR DOUBTFUL
ACCOUNTS IS UPDATED BY
PERCENTAGE OF ACCOUNTS
RECEIVABLES
1. The allowance for doubtful accounts is estimated at a
certain percentage of the accounts receivables
2. The allowance for doubtful accounts is increased to a
certain percentage of the accounts receivables
3. The allowance for doubtful accounts is increased by a
certain percentage of the accounts receuvables
GENERAL FORMULA TO COMPUTE FOR THE
DOUBTFUL ACCOUNTS EXPENSE UNDER
THE ALLOWANCE METHOD

Accounts receivable, end P xxx

Multiplied by estimated loss rate 0.xx
Required allowance P xxx
Allowance for doubtful accounts, before adjustment (xxx)
Doubtful accounts expense P xxx
Illustrative Problem
Mendoza Trading shows the following balance in its books as of
12/31/20
Accounts Receivable P 500,000
Allowance for Doubtful Account 30,000

Determine the amount of doubtful accounts expense to be

recorded by the entity in 2020 under the following situations:
1. The Allowance for Doubtful Accounts is estimated at 10% of
Accounts Receivable.
2. The Allowance for Doubtful Accounts is increased to 15% of
Accounts Receivable.
2. The Allowance for Doubtful Accounts is increased by 5% of
Accounts Receivable.
Illustrative Problem
Mendoza Trading shows the following balance in its books as of 12/31/20

Accounts Receivable P 500,000

Allowance for Doubtful Accounts 30,000
1. The Allowance for Doubtful Accounts is estimated at 10% of Accounts
Receivable.
Accounts receivable, end P 500,000
Multiplied by estimated loss rate 0.10
Required allowance P 50,000

(30,000)
Allowance for doubtful accounts, before adjustment
Doubtful accounts expense P 20,000
Illustrative Problem
Mendoza Trading shows the following balance in its books as of 12/31/20

Accounts Receivable P 500,000

Allowance for Doubtful Accounts 30,000
2. The Allowance for Doubtful Accounts is increased to 15% of Accounts
Receivable.
Accounts receivable, end P 500,000
Multiplied by estimated loss rate 0.15
Required allowance P 75,000

(30,000)
Allowance for doubtful accounts, before adjustment
Doubtful accounts expense P 45,000
Illustrative Problem
Mendoza Trading shows the following balance in its books as of 12/31/20

Accounts Receivable P 500,000

Allowance for Doubtful Accounts 30,000
3. The Allowance for Doubtful Accounts is increased by 5% of the
accounts receivables
Accounts receivable, end P 500,000
Multiplied by estimated loss rate 0.05
Doubtful accounts expense P 25,000

30,000
Allowance for doubtful accounts, before adjustment
Required allowance P 55,000
METHODS OF ESTIMATING LOSS ON A/R
A. THE ALLOWANCE FOR DOUBTFUL ACCOUNTS IS
UPDATED BY PERCENTAGE OF ACCOUNTS
RECEIVABLES

B. AGING OF ACCOUNTS RECEIVABLES

C. PERCENTAGE OF SALES METHOD – NOT ACCEPTED

ANYMORE BASED ON IFRS 9
AGING OF ACCOUNTS
RECEIVABLES
• Estimation of bad debts through creation of
categories or groups showing the number of days
the accounts are already past due.
• Analyzes in more detail the probability of collection
or non-collection of a particular customer account
based on the credit terms.
• The longer the period an account has been past
due, a higher estimated loss rate is assigned.
ILLUSTRATIVE PROBLEM
The following accounts were gathered from the records of Torres Company.:
Accounts Receivable, 12/31/21 P 8,000,000
Allowance for Doubtful Accounts, 1/1/21 150,000
Torres Company categorizes its outstanding accounts as follows:
Days Past Due Amount % Uncollectible
Current P 4,000,000 2
1 to 30 1,600,000 4
31 to 90 800,000 6
91 to 120 640,000 10
121 to 180 480,000 20
181 to 360 320,000 30
Over 360 160,000 50

Required: Determine the net realizable value of Accounts Receivable that must
be reported under the Current Assets section of the Statement of Financial
Position as of December 31, 2021
Given data of Torres Co:
Accounts Receivable, 12/31/21 P 8,000,000
Allowance for Doubtful Accounts, 1/1/21 150,000

Required
Days Past Amount % Uncollectible
Allowance
Due
(a) (b) (a x b)
Current P 4,000,000 2% P 80,000
1 to 30 1,600,000 4% 64,000
31 to 90 800,000 6% 48,000
91 to 120 640,000 10 % 64,000
121 to 180 480,000 20 % 96,000
181 to 360 320,000 30 % 96,000
Over 360 160,000 50 % 80,000
TOTAL P 8,000,000 P 528,000
At the end of the reporting period, Torres
Company’s accounts receivable should be
reported at the NRV of P7,472,000 under the
current assets section of its statement of financial
position.
Torres Company
Statement of Financial Position
As of December 31, 2021

Accounts receivable P 8,000,000

Allowance for doubtful accounts (528,000)
Net realizable value P 7,472,000
Given data of Torres Co.:
Accounts Receivable, 12/31/21 P 8,000,000
Allowance for Doubtful Accounts, 1/1/21 150,000

Required
Days Past Amount % Uncollectible
Allowance
Due
(a) (b) (a x b)
Current P 4,000,000 2% P 80,000
1 to 30 1,600,000 4% 64,000
31 to 90 800,000 6% 48,000
91 to 120 640,000 10 % 64,000
121 to 180 480,000 20 % 96,000
181 to 360 320,000 30 % 96,000
Over 360 160,000 50 % 80,000
TOTAL P 8,000,000 P 528,000
 Required allowance for doubtful accounts P 528,000
Allowance for doubtful accounts, unadjusted 150,000
Adjustment P 378,000

2020 Dec. 31 Doubtful accounts expense 378,000

Allowance for doubtful accounts 378,000

Torres Co.
Statement of Income
For the Year Ended December 31, 2020

Doubtful accounts expense 378,000

METHODS OF ESTIMATING LOSS ON A/R
A. THE ALLOWANCE FOR DOUBTFUL ACCOUNTS IS
UPDATED BY PERCENTAGE OF ACCOUNTS
RECEIVABLES

B. AGING OF ACCOUNTS RECEIVABLES

C. PERCENTAGE OF SALES METHOD

NOTES RECEIVABLES
It is also a trade receivable similar to accounts
receivable, but the former is a more formal claim
against another party. It is a written promise to pay
a certain sum of money at a specific future date.
ACCOUNTS RECEIVABLE VS. NOTES
RECEIVABLES
- IT MAY BE ORAL IN - HAS WRITTEN
NATURE PROMISE TO PAY

- TYPICALLY SHORT - MAY BE LONG

TERM CLAIMS AND TERM OR SHORT
NORMALLY CLASSIFED TERM
AS CURRENT ASSETS

- OPEN ACCOUNT AND - INTEREST

DOES NOT EARN BEARING
INTEREST
 ACCOUNTS RECEIVABLE VS. NOTES
RECEIVABLES
Subsequent
Initial Recognition
Recognition
Accounts Net realizable
Cost or face value
Receivable value
Present value
Notes Receivable,
using effective Carrying amount
long-term
interest method
INITIAL RECOGNITION
The requirements to recognize a short-term, interest-
bearing note receivable are the same as those for
accounts receivable. On the other hand, a long-term note
is initially recognized at its present value. In this case, an
entity has to know the effective interest rate of the note.
The reason why these notes are recorded at their
present value is that the nominal amount (face amount)
of cash that would be received in the future would have
less value or purchasing power than the nominal amount
of the same receivable had it been recognized in the
current period. It is important to take into account the
effect of the future value vis-a-vis present value because
of a number of factors, one of which is inflation.
INITIAL RECOGNITION
The effective interest rate or market rate is the rate
used to determine the present value of a note or
any other long-term negotiable instrument. The
effective interest rate is different from a note's
nominal or coupon rate. The coupon rate
determines the cash that the payee will receive
regularly from the note, while the effective interest
rate determines the interest income to be recorded
by the payee.
INITIAL RECOGNITION
The two rates may or may not be equal. The
nominal rate may also be zero, which means that
the note is a noninterest-bearing one.

To determine the present value of a note, apart

from the fact that one has to be familiar with the
present value formula, it is necessary to
understand the cash flows by the specific
conditions stated in the note. The agreement
would dictate the present value formula or
formulas to be used.
DISCUSSIONS
1. NOTE RECEIVABLE IS RECORDED AT A DISCOUNT
EFFECTIVE RATE > NOMINAL RATE

2. NOTE RECEIVABLE IS RECORDED AT A PREMIUM

EFFECTIVE RATE < NOMINAL
RATE
Illustrative Problem 1.a: Effective interest rate > Nominal rate
Note receivable recorded at a DISCOUNT
Assume that on January 1, 2021, Jack Enterprises received
a 10% five-year note, having a face value of P1,000,000.
The note pays interest every December 31. On the date of
the receipt of the note, the effective interest rate was 11%.

Face value or future value: nominal amount of cash that would be

received in the future (January 1, 2026) which by then has less
value or purchasing power had it been recognized on January 1,
2021.
Nominal/coupon/stated rate: determines the cash that the payee,
Jack Enterprises will receive regularly from the note.
Effective interest rate or market rate: determines the interest income
to be recorded by the payee, Jack Enterprises.
Assume that on January 1, 2021, Jack Enterprises received a 10%
five-year note, having a face value of P1,000,000. The note pays
interest every December 31. On the date of the receipt of the note,
the effective interest rate was 11%.
INITIAL RECOGNITION
Effective interest method to determine the PRESENT VALUE:
1. Present value of a single sum for the principal of P1,000,000

PV Present value of principal

PV = FV (1 + i) -t FV Future value or face value of principal
i Effective interest rate 11%
t term of the note 5 yrs
INITIAL RECOGNITION
Effective interest method to determine the PRESENT VALUE:

1. Present value of a single sum for the principal of P1,000,000

PV Present value of principal
PV = FV (1 + i) -t FV Future value or face value of principal
i Effective interest rate 11%
t term of the note 5 yrs

2. Present value of an ordinary annuity of 1 for the nominal interest of

P100,000 (P1M x 10%).
P = period payment, or the cash
PVOA =P 1 - (1 + i) -t receipt from interest:
i Principal of the note x nominal rate 10%
Assume that on January 1, 2021, Jack Enterprises received a 10%
five-year note, having a face value of P1,000,000. The note pays
interest every December 31. On the date of the receipt of the note,
the effective interest rate was 11%.

Present value computation using ordinary calculator

"Short-cut"" method
1. Enter "1.11"
2. Press "divide"key once
3. Press "equal" key FIVE times (term of the note)

4. You should get 0.59345133 - the PV Factor of the principal

Assume that on January 1, 2021, Jack Enterprises received a 10%
five-year note, having a face value of P1,000,000. The note pays
interest every December 31. On the date of the receipt of the note,
the effective interest rate was 11%.

5. Press "minus" key, "1" key, and "equal" key.

6. Press "(+/-)" key to remove the negative sign
7. Press the "divide" key and enter ".11"
8. You should get 3.6958970 - the PVOA FACTOR of the
interest
Assume that on January 1, 2021, Jack Enterprises received a 10% five-year
note, having a face value of P1,000,000. The note pays interest every
December 31. On the date of the receipt of the note, the effective interest
rate was 11%.

Present value of principal

P1,000,000 x 0.59345133
Present value of interest

Total present value

Face amount of note
Discount on note receivable
Assume that on January 1, 2021, Jack Enterprises received a 10%
five-year note, having a face value of P1,000,000. The note pays
interest every December 31. On the date of the receipt of the note,
the effective interest rate was 11%.

Present value computation using ordinary calculator

"Short-cut"" method
1. Enter "1.11"
2. Press "divide"key once
3. Press "equal" key FIVE times (term of the note)

4. You should get 0.59345133 - the PVF of the principal

Assume that on January 1, 2021, Jack Enterprises received a 10%
five-year note, having a face value of P1,000,000. The note pays
interest every December 31. On the date of the receipt of the note,
the effective interest rate was 11%.
Present value of principal
P1,000,000 x 0.59345133 P 593,451.33

Present value of interest

P1,000,000 x 10% x
3.6958970
Total present value
Face amount of note
Discount on note receivable
Assume that on January 1, 2021, Jack Enterprises received a 10%
five-year note, having a face value of P1,000,000. The note pays
interest every December 31. On the date of the receipt of the note,
the effective interest rate was 11%.

5. Press "minus" key, "1" key, and "equal" key.

6. Press "(+/-)" key to remove the negative sign
7. Press the "divide" key and enter ".11"
8. You should get 3.6958970 - the PVF of the interest
Assume that on January 1, 2021, Jack Enterprises received a 10% five-
year note, having a face value of P1,000,000. The note pays interest
every December 31. On the date of the receipt of the note, the effective
interest rate was 11%.
Present value of principal
P1,000,000 x 0.59345133 P 593,451.33

Present value of interest

P1,000,000 x 10% x 369,589.70
3.6958970
Total present value of note, 1/1/21 P 963,041.03
Face amount of note 1,000,000.00
Discount on note receivable P 36,958.97
Initial recognition, 1/1/21
Face amount of note receivable P 1,000,000.00
Discount on note receivable (36,358.97)
Present value of note receivable P 963,041.03
 Amortization table on SUBSEQUENT RECOGNITION\
Date (a) (b) ( c) (d)
Carrying
Interest
Cash received Amortization of amount
earned
(P1M x 10%) discount (a-b) (Previous CA +
(CA x 11%)
c)
01/01/21 963,041.03
12/31/21 105,934.51 100,000.00 5,934.51 968,975.54
12/31/22 106,587.31 100,000.00 6,587.31 975,562.85
12/31/23 107,311.91 100,000.00 7,311.91 982,874.76
12/31/24 108,116.21 100,000.00 8,116.21 990,990.98
12/31/25 109,009.02 100,000.00 9,009.02 1,000,000.00
01/01/26 Full collection
Initial recognition, 1/1/21
Face amount of note receivable P 1,000,000.00
Discount on note receivable (36,958.97)
Present value of note receivable P 963,041.03
Subsequent recognition, 12/31/21
Face amount of note receivable P 1,000,000.00
Discount on note receivable (31,024.46)
Carrying amount of note receivable P 968,975.54
 Amortization table on SUBSEQUENT RECOGNITION
Date (a) (b) ( c) (d)
Carrying
Interest
Cash received Amortization of amount
earned
(P1M x 10%) discount (a-b) (Previous CA +
(CA x 11%)
c)
01/01/21 963,041.03
12/31/21 105,934.51 100,000.00 5,934.51 968,975.54
12/31/22 106,587.31 100,000.00 6,587.31 975,562.85
12/31/23 107,311.91 100,000.00 7,311.91 982,874.76
12/31/24 108,116.21 100,000.00 8,116.21 990,990.98
12/31/25 109,009.02 100,000.00 9,009.02 1,000,000.00
01/01/26 Full collection 0
Initial recognition, 1/1/21
Face amount of note receivable P 1,000,000.00
Discount on note receivable (36,958.97)
Present value of note receivable P 963,041.03
Subsequent recognition, 12/31/21
Face amount of note receivable P 1,000,000.00
Discount on note receivable (31,024.46)
Carrying amount of note receivable P 968,975.54
Subsequent recognition, 12/31/22
Face amount of note receivable P 1,000,000.00
Discount on note receivable (24,437.15)
Carrying amount of note receivable P 975,562.85
 Effective interest rate < Nominal rate
Illustrative Problem 1.b:
Note receivable recorded at a PREMIUM
Assume that on January 1, 2021, Jack Enterprises received
a 13% five-year note, having a face value of P1,000,000.
The note pays interest every December 31. On the date of
the receipt of the note, the effective interest rate was 11%.
Assume that on January 1, 2021, Jack Enterprises received a 13%
five-year note, having a face value of P1,000,000. The note pays
interest every December 31. On the date of the receipt of the note,
the effective interest rate was 11%.

Present value computation using ordinary calculator

"Short-cut"" method
1. Enter "1.11"
2. Press "divide"key once
3. Press "equal" key FIVE times (term of the note)

4. You should get 0.59345133 - the PVF of the principal

Assume that on January 1, 2021, Jack Enterprises received a 13%
five-year note, having a face value of P1,000,000. The note pays
interest every December 31. On the date of the receipt of the note,
the effective interest rate was 11%.

5. Press "minus" key, "1" key, and "equal" key.

6. Press "(+/-)" key to remove the negative sign
7. Press the "divide" key and enter ".11"
8. You should get 3.6958970 - the PVF of the interest
Assume that on January 1, 2021, Jack Enterprises received a 13% five-year
note, having a face value of P1,000,000. The note pays interest every
December 31. On the date of the receipt of the note, the effective interest
rate was 11%.

Present value of principal

P1,000,000 x 0.59345133
Present value of interest

Total present value

Face amount of note
Discount on note receivable
Assume that on January 1, 2021, Jack Enterprises received a 10%
five-year note, having a face value of P1,000,000. The note pays
interest every December 31. On the date of the receipt of the note,
the effective interest rate was 11%.

Present value computation using ordinary calculator

"Short-cut"" method
1. Enter "1.11"
2. Press "divide"key once
3. Press "equal" key FIVE times (term of the note)

4. You should get 0.59345133 - the PVF of the principal

Assume that on January 1, 2021, Jack Enterprises received a 13%
five-year note, having a face value of P1,000,000. The note pays
interest every December 31. On the date of the receipt of the note,
the effective interest rate was 11%.
Present value of principal
P1,000,000 x 0.59345133 P 593,451.33

Present value of interest

P1,000,000 x 13% x 480,466.61
3.6958970
Total present value P 1,073,917.94
Face amount of note 1,000,000.00
PREMIUM on note receivable P 73,917.94
Assume that on January 1, 2021, Jack Enterprises received a 10%
five-year note, having a face value of P1,000,000. The note pays
interest every December 31. On the date of the receipt of the note,
the effective interest rate was 11%.

5. Press "minus" key, "1" key, and "equal" key.

6. Press "(+/-)" key to remove the negative sign
7. Press the "divide" key and enter ".11"
8. You should get 3.6958970 - the PVF of the interest
Initial recognition, 1/1/21
Face amount of note receivable P 1,000,000.00
Premium on note receivable 73,917.94
Present value of note receivable P 1,073,917.94
 Amortization table on SUBSEQUENT RECOGNITION
Date (a) (b) ( c) (d)

Interest Cash Amortization

Carrying amount
earned received of premium
(Previous CA + c )
(CA x 11%) (P1M x 13%) (a-b)

01/01/21 1,073,917.94
12/31/21 118,130.9 130,000.00 (11,869.03 1,062,048.91
12/31/22 116,825.37 130,000.00 (13,174.62) 1,048,874.29
12/31/23 115,376.1 8 130,000.00 (14,623.83) 1,034,250.47
12/31/24 113,767.5 7 130,000.00 (16,232.45) 1,018,018.02
12/31/25 111,981.95 130,000.00 (18,018.02) 1,000,000.00
8
01/01/26 Full collection ) 0
Initial recognition, 1/1/21
Face amount of note receivable P 1,000,000.00
Premium on note receivable 73,917.94
Present value of note receivable P 1,073,917.94
Subsequent recognition, 12/31/21
Face amount of note receivable P 1,000,000.00
Premium on note receivable 62,048.91
Carrying amount of note receivable P 1,062,048.91
DERECOGNITION OF ALL RECEIVABLES
According to paragraph 3.2.3 of PFRS 9, financial
assets such as receivables are derecognized when and
only when:
a. The contractual right to the cash flows from the
financial asset expire
b. It transfers the financial asset, and the transfer qualifies
for derecognition
ANALYSIS OF ACCOUNTS RECEIVABLE
One can evaluate an entity’s financial performance and
financial condition with regard to its accounts and notes
receivable by using FINANCIAL RATIOS.

Financial Ratios take into account the relationship between

elements in the financial statements and offer users
valuable insights regarding the two key performance
measures, namely performance and condition.
 ANALYSIS OF ACCOUNTS RECEIVABLE

Accounts receivable turnover = Net credit sales

Average accounts receivable

Average collection period = 365 days

Accounts receivable turnover
 SAMPLE PROBLEM
Groot Emporium
Comparative Balance Sheet
2021 2020
Accounts Receivable 250,000 130,000
Comparative Income Statement
2021 2020
Sales 6,522,500 5,642,000

Take Note: 25% of sales is CREDIT SALES

 SAMPLE PROBLEM

Accounts receivable turnover = Net credit sales

Average accounts receivable
Accounts receivable turnover = 1,630,625
190,000

Accounts receivable turnover = 8.58 times

NET CREDIT SALES IS 25% x 6,622,500 = 1,630,625

AVERAGE A/R IS (250,000+130,000) DIVIDED BY 2 =
190,000
SAMPLE PROBLEM

Average collection period = 365 days

Accounts receivable turnover
Average collection period = 365 days
8.58

Average collection period = 42 days

RECEIVABLE FINANCING
It is a technique undertaken by entities to expedite
cash flows from their receivable, which would involve
the selling, pledging, assigning and factoring of
customer accounts. Additionally, cash can also be
obtained through discounting of notes receivables.
RECEIVABLE FINANCING

1.PLEDGING
2.ASSIGNMENT
3.FACTORING
4.DISCOUNTING OF NOTES RECEIVABLES
1. PLEDGING
It refers to the offering of A/R as collateral
against an existing loan. Just like in any other
pledging arrangement, the ownership does not
transfer to the creditor yet, nor are the
collections used to pay off the debt. The
ownership and control over the receivables
would only transfer to the creditor if the debtor
defaults on his/her debt, and when this happen,
the entire amount of receivables pledged will be
used as payment of the existing loan.
1. PLEDGING
FINANCIAL REPORTING
- Accounts receivables that have been pledged will
not be removed despite the pledging arrangement.
Only a disclosure is required for this transaction as
required by PFRS 7. Paragraph 14 states that an
entity should disclose the carrying amount of the
receivables pledged as collateral, as well as the
terms relating to the pledge.
2. ASSIGNMENT
Under this scheme, the entity, called the assignor,
obtains a loan from a creditor, who is the assignee.
The loan is to be repaid by the collection of the
accounts receivable that is assigned to the creditor.
When the accounts receivables are assigned, the
responsibility of collecting the accounts may be given
by the firm to the creditor.
2. ASSIGNMENT
However, the ownership of the accounts is till
retained by the firm. Once the accounts are assigned
to the creditor-assignee, a new account. “Accounts
receivable- assigned” is set by the entity in its books.

The assignment of accounts receivable may be done

on a non-notification or notification basis.
2. ASSIGNMENT
FINANCIAL REPORTING
- Paragraph 42D of IFRS 7 requires that the debtor-
assignee disclose the net position in the accounts
assigned. Net position is also known as equity in the
assigned accounts. It is the difference between the
carrying amount of the accounts assigned and the
carrying amount of related liability.
3. FACTORING
When the accounts receivable are factored, the
entity actually sells its accounts receivable to a buyer
called FACTOR.
The factor does not normally pay the seller the entire
face value of the receivables being factored because
of the risk of no—collection of accounts. Normally,
the factor would only pay the seller a portion of the
face value of receivables factored.
3. FACTORING
Factoring the accounts receivables requires a
derecognition of the accounts receivable transferred
to the factor because the seller transfers significantly
all of risks and rewards associated with the
receivables.

Cash 1M
Loss 200k
A/R. 1.2M
4. DISCOUNTING OF NOTES RECEIVABLES
Discounting of notes receivables is undertaken when
the entity wants to have its notes turned into cash
prior to their maturity date. The entity endorses the
unmatured note to a financial institution which is
usually a bank. The proceeds of the note will depend
on its remaining term, nominal interest rate and face
value.
4. DISCOUNTING OF NOTES RECEIVABLES
Notes may be discounted with or without recourse. If
they are discounted with recourse, the bank may go
after the entity to collect the maturity value of the
note, plus a protest fee of the maker dishonors it.
However, if the note is discounted without recourse,
the bank can no longer collect from the entity, which
discounted the note, should the maker dishonor the
note.
Questions?
Thank you.
 REFERENCES

Accounting Text and Cases, 10th Edition, McGraw-Hill/Irwin

Basic Approach to Financial Accounting (User’s Perspective) , Salendrez,

Menaje Jr., Paril, Tubay