ACYFARP: Accounting for Receivables

Receivable

A financial asset that represents a contractual right to receive cash or other financial asset from another party.

Receivable

It represents the amount collectible from customers or other parties arising from sale of goods, rendering of services, or claims for money lent.

Receivable

Under PFRS 15, it is an entity's unconditional right to consideration.

Normal Operating Cycle

Is the time between the acquisition of materials entering into a process (or the acquisition of goods for sale) and their realization in cash or cash equivalents.

Accounts Receivable

These are open accounts arising from sale of goods and services in the normal course of business.

Notes receivable from customers

Those customer accounts supported by formal promises to pay in the form of promissory notes.

Advances to (or receivables from) officers, directors, shareholders, or employees

Current Asset - if collectible within 12 months from the reporting date.

Non-current Asset - if collectible beyond 12 months from the reporting date.

Advances to affiliates (associates, subsidiaries, branches)

Generally classified as noncurrent asset unless collectible within 12 months from the reporting date.

Advances to suppliers for purchase of merchandise

Classified as current asset

Subscription receivable

Presented as a deduction from subscribed share capital if collectible beyond 12 months from the reporting date.

Subscription receivable

Presented under current assets if collectible within 12 months from the reporting date.

Suppliers' debit balances

Are debit balances in accounts payable resulting from overpayments, returns and allowances, and advance payments to suppliers.

Suppliers' debit balances

Classified as current asset unless the amount is immaterial in which case an offset may be made against the accounts payable account.

Special deposits on contract bids

Generally classified as non-current asset unless collectible within 12 months from the reporting date.

Accrued income (dividend receivable, interest receivable, royalty receivable, rent receivable)

Classified as current asset.

Claims receivable (claims against common carries for losses and/or damages, claims for rebates and tax refunds, claims from insurance contracts)

Classified as current asset.

Customer's credit balances

These are credit balances in accounts receivable resulting from overpayments, returns and allowances, and advance collections from customers. Classified as current liabilities unless the amount is immaterial in which case an offset may be made against the accounts receivable amount.

True

(True or False) An entity shall recognize a financial asset in its financial position when and only when, the entity becomes a party to the contractual provision of the instrument.

FV + Directly Attributable Costs

The initial measurement of receivables.

Amortized Cost Using the Effective Interest Method

The subsequent measurement of receivables.

Accounts Receivable

Open accounts arising from sale of goods and services in the normal course of business.

Transaction Price

The initial measurement of accounts receivable.

Net Realizable value

The subsequent measurement of accounts receivable.

Accounts Receivable

The amount of payment to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected in behalf of third parties.

Trade Discounts

These are given to customers to encourage them to buy in bulk or large quantities. Known as quantity discounts. Usually stated in percentage form. These are deducted from the list price to arrive at invoice price. These are not recognized for financial accounting purposes.

Cash Discounts

These are given to credit customers to encourage them to pay their dues early. Known as early payments discount.

Gross Method

Sales and accounts receivable are recorded at gross invoice amount, meaning the cash discount offered is not yet deducted from the invoice amount. Cash discounts are recognized only when actually taken by customers. It is the most common and widely used method because it is simple to apply.

Net Method

Sales and accounts receivable are recorded at an amount net of cash discount offered. Cash discounts that are not taken by customers are credited to the sales discount forfeited account, which is classified as other income in the statement of comprehensive income.

Allowance Method

Accounts receivable is recorded at gross invoice amount while the sale is recorded at the amount net of cash discount offered, the difference credited to allowance for sales discount account.

Percentage of Sales Method

Sales * Uncollectibility Percentage (%) = Doubtful Accounts Expense

Percentage of Accounts Receivable

Accounts Receivable, End * Uncollectibility Percentage (%) = ADA, end

ADA, end - ADA, unadjusted = DAE

Aging of Accounts Receivable

This method is similar to the percentage of accounts receivable method except that it involves an analysis where the accounts are classified according to their ages.

Debit Balance in Allowance for Doubtful Accounts

Occurs when there are excessive receivable write-offs. This can be fixed or adjusted at year-end through provision of doubtful accounts expense for the year.

Net Realizable Value

A/R - ADA - SRs - SDs

Doubtful Accounts Expense

Presented as part of administrative expenses in the statement of comprehensive income since the credit granting function is performed by the credit department.

Notes Receivable

Accounts supported by formal promises to pay in the form of promissory notes.

Fair Value plus Directly Attributable Costs

The initial measurement of notes receivables.

Amortized Cost

The subsequent measurement of notes receivable.

Dishonored Notes

A promissory note that is not paid at maturity date.

Dishonored Notes

Should be transferred from notes receivable to accounts receivable account.

Loan Receivable

Is a financial asset arising from a loan granted by a bank or other financial institutions to a borrower or client.

Initial Measurement of Loans Receivable

Fair value plus transaction costs that are directly attributable to the acquisition of the financial asset.

Direct Origination Costs

Transactions that are directly attributable to the loan receivable.

Direct Origination Costs

Should be included in the initial measurement of the loan receivable.

Indirect Origination Costs

Should be treated as outright expense

Subsequent Measurement of Loans Receivable

Amortized Cost

Initial Amount of Loan Receivable is Lower than the Principal Amount

When this happens, the amortization of the difference is added to the carrying amount.

Initial Amount of Loan Receivable is Higher than the Principal Amount

When this happens, the amortization of the difference is deduced from the carrying amount.

Origination Fees

The fees charged by the bank against the borrower for the creation of the loan.

Origination Fees

Are recognized as unearned interest income and amortized over the term of the loan.

Direct Origination Costs

Occurs when the origination fees are not chargeable against the borrower.

True

(True or False) If the origination fees received exceed the direct origination costs, the difference is unearned interest income and the amortization will increase interest income.

True

(True or False) If the direct origination costs exceed the origination fees received, the difference is charged to direct origination costs and the amortization will decrease interest income.

Lifetime Expected Credit Losses

An entity shall measure the loss allowance for a financial instrument at an amount equal to the ________________________________ if the credit risk on that financial instrument has increased significantly since initial recognition.

Credit Losses

Are the present value of all cash shortfalls.

Expected Credit Losses

Are an estimate of credit losses over the life of the financial instrument.

Amount of Impairment Loss

Can be measured as the difference between the carrying amount and the present value of estimated future cash flows discounted at the original effective rate.

Credit Risk

Is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.

True

(True or False) The recognition of interest income is charged against the allowance for loan impairment account.

Stage 1 Impairment

This stage covers debt instruments that have not declined significantly in credit quality since initial recognition or that has low credit risk. Under this scenario, a 12-month expected credit loss is recognized.

Stage 2 Impairment

This stage covers debt instruments that have declined significantly in credit quality since initial recognition but do not have objective evidence of impairment. Under this scenario, a lifetime expected credit loss is recognized.

Stage 3 Impairment

This stage covers debt instruments that have objective evidence of impairment at the reporting date. Under this scenario, a lifetime expected credit loss is recognized.

12-month Expected Credit Loss

Is defined as the portion of the lifetime expected credit loss from default events that are possible within 12 months after the reporting period.

Lifetime Expected Credit Loss

Is defined as the expected credit loss that results from all default events over the expected life of the instrument.

True

(True or False) Under stages 1 and 2, interest income is computed based on the gross carrying amount or face amount.

True

(True or False) Under stage 3, interest income is based on the net carrying amount which is equal to the face amount minus allowance for loan impairment.

Receivable Financing

Is the financial flexibility or capability of an entity to raise money out of its receivables.

Pledging

When loans are obtained from the bank or any lending institution, the accounts receivable is collateralized as security for payment of the loan.

Pledging

Normally, the borrowing entity makes the collections of the accounts but may be required to turn over the collections to the banks in satisfaction for the loan.

Pledging

The loan is recorded by debiting cash and discount on note payable if loan is discounted, and crediting note payable.

Pledging

The subsequent payment of the loan is recorded by debiting note payable and crediting cash.

True

(True or False) With respect to the pledged accounts, no entry would be necessary. It is sufficient that disclosure thereof is made in a note to financial statements.

Discounting

In the banking parlance, this means that the interest for the term of the loan is deducted in advance.

Assignment of Accounts Receivable

Means that a borrower called the assignor transfers rights in some accounts receivable to a lender called the assignee in consideration for a loan.

Assignment

Is a more formal type of pledging of accounts receivable.

Assignment

Is a secured borrowing evidenced by a financing agreement and a promissory note both of which the assignor signs.

Pledging

Is general because all accounts receivable serve as collateral security for the loan.

Assignment

Is specific because specific accounts receivable serve as collateral security for the loan.

Assignment in a Nonnotification Basis

Customers are not informed that their accounts have been assigned. As a result, the customers continue to make payments to the assignor, who in turn remits the collections to the assignee.

Assignment in a Notification Basis

Customers are notified to make their payments directly to the assignee. The assignee usually lends only a certain percentage of the face value of the accounts assigned because the assigned accounts may not be fully realized by reason of such factors as sales discount, sales return and allowances and uncollectible accounts. The assignee usually charges interest for the loan that it makes and requires a service or financing charge or commission for the assignment agreement.

True

(True or False) An entity must disclose its equity in the assigned accounts receivable.

Equity in Assigned Accounts

Accounts receivable , Assigned - Note Payable, Bank

Factoring

Is a sale of accounts receivable on a without recourse, notification basis.

Factoring

In this agreement, an entity sells accounts receivable to a bank or finance entity called a factor.

Factoring

A gain or loss is recognized for the difference between the proceeds received and the net carrying amount of the receivables factored.

Factoring

Differs from an assignment in that an entity actually transfers ownership of the accounts receivable to the factor. Thus, the factor assumes responsibility for uncollectible factored accounts.

Assignment

In this agreement, the assignor retains ownership of the accounts assigned.

Assignment

The assignor retains ownership of the accounts assigned. Because of the nature of the transaction, the customers whose accounts are factored are notified and required to pay directly to the factor.

Casual Factoring

If an entity finds itself in a critical cash position, it may be forced to factor some or all of its accounts receivable at a substantial discount to a bank or a finance entity to obtain the much needed cash.

Factoring as a Continuing Agreement

Factoring may involve in a continuing agreement where a finance entity purchases all of the accounts receivable of a certain entity. In this setup, before a merchandise is shipped to a customer, the selling entity requests the factor's credit approval.

Factor's Holdback

The instance when a factor may withhold a predetermined amount as a protection against customer returns and allowances and other special adjustments.

Factor's Holdback

Is usually a receivable from factor and classified as current asset. Final settlement is made after the factored receivables have been fully collected.

Recourse Obligation

Is initially recorded as loss on factoring. In determining the cash initially received from factoring, it is not accounted.

True

(True or False) Assigned receivables are presented in the statement of financial position as regular receivables which is included under the line item "trade and other receivables". However, the equity in the assigned accounts shall be disclosed in the notes.

True

(True or False) The assigned receivable and the related loan are presented separately in the statement of financial position and are not offset.

Factoring of Accounts Receivable

It is the sale of accounts receivable to a factor (on a financial institution) on a without recourse basis.

Gain or Loss on Factoring

Net Selling Price (Gross A/R - Factoring Fees and Charges) - Carrying Amount of Accounts Receivable

Cash Received from Financing

Gross A/R - Factor's Holdback

Carrying Amount of A/R

Gross A/R - Allowance for Doubtful Accounts

Discounting of Notes Receivable

It is a sale of note to a third party (i.e. bank).