Page 1 of 10 | FAR Handouts No. 04
RECEIVABLES
KARIM G. ABITAGO, CPA
RECEIVABLES
KARIM G. ABITAGO, CPA
Receivables in General
Definition
Receivables are financial assets because they represent a contractual right to receive cash or another financial
asset from another entity.
Measurement
Initial Measurement
Fair Value + Transaction Costs
Subsequent Measurement
Amortized Cost
Classification
(1)
Trade Receivable – are receivables arising from the sale of goods and services in the ordinary course of business.
Presentation on the FS: classified as current assets when they are expected to be realized in cash within the
normal operating cycle or one year, whichever is longer.
Examples: Trade accounts receivable, trade notes receivable and trade instalment receivable.
(2)
Non-trade Receivable – are receivables arising from other sources.
Presentation on the FS: classified as current assets when they are expected to be realized in cash within one
year, the length of the operating cycle notwithstanding.
Presentation
All trade and current non-trade receivables are presented in one line item in the current asset section of the
Statement of Finacial Position as “Trade and Other Receivables”.
Accounts Receivable
Initial Measurement:
Transaction Price / Invoice Price
Notes:
(a)
To compute invoice price, it should be net of trade discount or volume discount and net of cash discounts if the
company is using net method.
Solution guide:
List price
xxx
Less: 1st Trade Discount
xxx
Balance
xxx
Less: 2nd Trade Discount
xxx
Invoice Price
xxx
Illustration
An entity sold goods to its customers at a list price of P10,000 on account under credit terms 10, 20, 2/10 n/30.
The 10, 20 figures represent the trade discount. This means that the first trade discount is 10% and the second
trade discount is 20%.
The 2/10 n/30 means that there is an available 2% cash discount if the customer pay on or before the 10th day and
the credit terms is 30 days.
List price
P10,000
Less: 1st Trade Discount (10% x 10,000)
1,000
Balance
9,000
Less: 2nd Trade Discount (20% x 9,000)
1,800
Invoice Price
7,200
Summary of Journal Entries
Gross Method
Net Method
(1)
Sale on account
Accounts receivable
7,200
Accounts receivable
7,056
Sales
7,200
Sales
7,056
(2)
Assume collected
Cash
7,056
Cash
7,056
within discount
Sales discount
144
Accounts receivable
7,056
period
Accounts receivable
7,200
(3)
Assume collected
Cash
7,200
Cash
7,200
beyod discount
Accounts receivable
7,200
Sales discount forfeited
144
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Page 2 of 10 | FAR Handouts No. 04
KARIM G. ABITAGO, CPA
RECEIVABLES
(b)
period
Accounts receivable
7,056
Credit balances or negative balances in accounts receivable resulting from overpayments or advances cannot be
offset against receivables with positive balances. These should be presented as current liabilities.
Subsequent Measurement:
Net Realizable Value = Gross Balance – Allowances
(a)
To compute the ending gross balance of accounts receivable, please see the below template.
Accounts Receivable
Beg. Balance xx
Credit Sales xx
Sale Discount Forfeited
End. Balance
Collections
Sales Discount
Sales Return
Notes As Payment
Write-off
xx
xx
xx
xx
xx
xx
There are four types of allowances: (1) Allowance for sales returns (2) Allowance for sales discounts (3) Allowance for
freight charge (4) Allowance for doubtful accounts
Note:
(1)
Entry for allowance for sales returns
Sales returns
xx
Allowance for sales returns
xx
(2)
Entry for allowance for sales discounts
Sales discounts
xx
Allowance for sales discounts
xx
(3)
Allowance for freight charge - results when the shipping term is FOB Destination, Freight Collect
Accounting for Freight Charges
Party
Who is chargeable?
Who actually paid?
Buyer
FOB Shipping Point
Freight Collect
Seller
FOB Destination
Freight Prepaid
Note: If freight charges resulted to an increase in accounts receivable due to the credit terms,
always
remember that it is not subject to cash discount. In other words, it will increase the amount of cash to be received
by the seller but this amount can’t be subject to cash discount.
(4)
Allowance for doubtful accounts
Accounting for
bad debts
Direct Write-off
Method
Allowance
Method
Balance Sheet
Method
Income
Statement
Method
Percent of AR
Method (ADA)
Aging Method
(ADA)
Percent of Credit
Sales Method
(DAE)
Mixed
Summary of journal entries in accounting bad debts
Direct Write-off
Allowance
(1) Collectability becomes doubtful
No Entry
Bad Debts Exp.
xx
Allowance for BD
(2) Write-off
Bad Debts Exp.
xx
Allowance for BD
xx
AR
xx
AR
(3) Recovery
AR
xx
AR
xx
BDE/Gain
xx
Allowance for BD
Cash
xx
Cash
xx
AR
xx
AR
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KARIM G. ABITAGO, CPA
RECEIVABLES
To compute the ending gross balance of allowance for doubtful accounts, please see the below template.
Allowance for Doubtful Accounts (ADA)
Write-off xx
Beg. Balance
xx
Doubtful Accounts Expense
xx
(DAE)
Recovery
xx
End. Balance
xx
Notes Receivable
Definition
Notes receivable are claims supported by formal promises to pay usually in the form of notes. a promissory note is
a written contract in which one person, known as the maker, promises to pay another person, known as the payee,
a definite sum of money.
Measurement
Classification
Initial Measurement
Subsequent Measurement
Interest bearing
Short-term
Non-interest bearing*
Face Value
with reasonable rate
Amortized Cost
Interest bearing
Long-term
with unreasonable rate**
Present Value
Non-interest bearing
*Assuming discounting is immaterial; otherwise it should be presented in present value.
** Notes with unreasonable rate bears an interest which is not equal to the market rate of interest.
Loans Receivable
Definition
A loan receivable is a financial asset arising from a loan granted by a bank or other financial institution to a
borrower or client. The term of the loan may be short-term but in most cases, the repayment periods cover several
years.
Measurement
Initial Measurement
Face Value
Add: Direct Origination Costs
Less: Origination Fee
Initial Carrying Value (ICV)
xx
xx
(xx)
xx
Subsequent Measurement
Amortized Cost
NOTE:
(1)
(2)
If
Scenario
Interest
Treatment on Amort.
ICV > Face Value
Premium
Nominal Interest > Effective Interest
Deduct from CA
ICV < Face Value
Discount
Nominal Interest < Effective Interest
Add to CA
The fees charged by the bank against the borrower for the creation of the loan are known as "origination
fees". Direct origination costs are directly attributable costs incurred by the lender to originate a loan
Impairment of Loans
Impairment is the decrease in the carrying amount of a receivable due objective evidence of loss events.
PFRS 9, paragraph 5.2.2, in conjunction with PAS 39, paragraph 58, provides that an entity shall assess at every
end of reporting period whether there is objective evidence that a financial asset or group of financial assets is
impaired. If such evidence exists, the entity shall determine and recognize the amount of any impairment loss.
The carrying amount of the loan receivable shall be reduced either directly or through the use of an allowance
account.
The amount of the impairment loss shall be recognized in profit or loss.
How to compute impairment loss?
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KARIM G. ABITAGO, CPA
RECEIVABLES
Carrying amount of loan receivable *
PV of recoverable amount **
Impairment Loss
xx
xx
xx
Receivable Financing
Definition
This refers to the act of inducing cash inflows from the receivables other than collection on a normal basis. Simply
stated, it is the financial flexibility of an entity to raise money out of its receivable.
Common Forms
The following are the common forms of receivable financing:
(1)
Pledge / Hypothecation
(2)
Assignment
(3)
Factoring
(4)
Discounting
Pledge / Hypothecation
Characteristics:
(1)
Receivables serve as collateral security for loans. (Pledge is a secured borrowing transaction)
(2)
Pledge receivables are not derecognized; thus there is no change in receivable balance.
(3)
Disclosure of AR pledged is required
Frequently asked questions (FAQs):
(1)
Proceeds from pledge
Solution guide:
Face value of loan
Less: Discount on loan
Net proceeds from pledge
xx
xx
xx
Assignment
To properly understand what assignment of receivables is, let us compare it with pledge.
Pledge
(1)
Formal?
X
(2)
Transfer of rights?
X
(3)
Transfer of ownership?
x
(4)
AR serve as security
✔
(General)
Assignment
✔
✔
x
✔
(Specific)
Features of Assignment:
(1)
The loanable amount is only a percentage of the face value of AR.
(2)
Bank charges a service fee or commission in advance.
(3)
Equity on assigned accounts should be disclosed in notes to FS.
Forms of Assignment:
(a)
Notification basis - debtors whose receivables have been assigned are notified of the assignment. Hence, the
debtors will remit payments on the receivables not to the assignor but to the assignee.
(b)
Non-notification basis - debtors whose receivables have been assigned are NOT notified of the assignment. Hence,
the debtors will continue to remit payments on the receivables to the assignor. Assignments are commonly made on
a non-notification basis.
Frequently asked questions (FAQs):
(1)
Proceeds from assignment
Solution guide:
Face value of loan (certain % x face value of AR)
Less: Commission and other charges
Net proceeds from assignment
(2)
xx
xx
xx
Equity on assigned accounts
Solution guide:
CA of AR (use the template on AR in computing end. balance)
Less: CA of loans payable (Beg. Balance less payments)
Equity on assigned accounts
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Page 5 of 10 | FAR Handouts No. 04
KARIM G. ABITAGO, CPA
RECEIVABLES
NOTE: Payments on the loan balance come from collections. So if the problem is silent, the whole collections are
applied as payment to the loans and there is a separate payment for interest. There will be a problem in the
computation of the equity on assigned accounts if the collections are applied as payment for both principal (loan)
and interest. As a rule, the payment should be applied first to interest and the remaining collections should be
applied to principal.
Factoring
It is a sale of accounts receivable usually on a without recourse, notification basis to a factor (usually a bank). The
factor then assumes responsibility for uncollectible accounts.
Forms of factoring
(1)
Factoring without recourse (if silent) – the transferor is not liable in case the debtor fails to pay.
(2)
Factoring with recourse – the transferor guarantees payment in the event the debtor fails to pay.
Frequently asked questions (FAQs):
(1)
Proceeds from factoring
Solution guide:
Face value of AR
xx
Less: Commission and other charges
xx
Factor’s holdback*
xx
Net proceeds from factoring
xx
* an amount retained by the factor as a cushion for sales returns, discounts and allowances. This is a receivable
account.
(2)
Gain or loss on factoring
Solution guide:
Selling Price (Net Proceeds + Factors’ Holdback)
Less: CA of AR (NRV)
Gain or Loss on Factoring
NOTE: There is NO gain or loss on factoring if factoring is on a with recourse basis.
xx
xx
xx
Discounting
This is a transfer or endorsement of a promissory note by the payee in favour of another party, usually a bank.
Forms of Discounting
Types of
Negotiation
(1)
(2)
Without
Recourse Basis
With Recourse
Basis (if silent)
Conditional Sale
(if silent)
Secured
Borrowing
Discounting without recourse basis – the holder is not held liable in the case the maker fails to pay. The note
discounted has been essentially sold outright and therefore derecognized.
Discounting with recourse basis – the holder is held liable in case the maker fails to pay. The note receivable is not
derecognized.
(a)
Conditional sale – a contingent liability is disclosed in the notes to financial statements.
(b)
Secured borrowing – a liability is recognized on the discounting.
Frequently asked questions (FAQs):
(1)
Proceeds from discounting
(2)
Solution guide:
Maturity Value (Principal + Total Interest)
xx
Less: Discount (MV x Discount Rate x Discount Period)
xx
Net proceeds from discounting
xx
NOTE: (1) Maturity value is the amount due on the note at the date of maturity.
(2) Discount period is the period of time from date of discounting to maturity date. It is the unexpired term of the
note.
Gain or loss on discounting
Solution guide:
Selling Price (Net Proceeds)
xx
Less: CA of NR (including accrued interest)
xx
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