Intermediate
Financial Accounting I
Cash and Receivables
Objectives of this Chapter
I. Discuss the asset valuation methods.
II. Identify items to be included in the
cash account and discuss how cash
and related items are reported.
III. Explain accounting issues related to
valuation of accounts receivables -trade discount, sales discount, sales
returns and allowance, and
uncollectible accounts.
Cash and Receivables
2
Objectives of this Chapter (contd.)
IV.Discuss the means to use accounts
receivable as a financial instrument -pledge, assign and factor.
V. Discuss the valuation of notes
receivable and the disposition of notes
receivable.
Cash and Receivables
3
I. Assets Valuation Methods
A. Acquisition Cost (Historical Cost):
Used in the initial recording for all assets
except for:
1. Investment in debt securities-held-tomaturity.
2. Long-term monetary assets (i.e., Longterm N/R).
B. Current Entry Value (Replacement
Cost): Applied in the inventory valuation
(LCM).
Cash and Receivables
4
Assets Valuation Methods (contd.)
C. Current Exit Value (net selling price or
market value): Applied in the valuation
of trading securities and securitiesavailable-for-sale.
D. Net Present Value:
Applied in the valuation of investment in
debt securities-held-to-maturity and
long-term monetary assets.
Note: SFAS 159 allows the fair value
option for financial assets and liablitlieis.
Cash and Receivables
5
Cash and Receivables



Liquidity: The amount of time expected
to elapse until an asset is converted
into cash.
Liquid assets: Assets are available for
conversion into cash quickly (i.e., cash,
receivables, trading securities, etc..).
Liquidity is an indication of a company’s
ability to meet its obligation.
Cash and Receivables
6
II. Cash

What are included in the cash account?
A. Cash on hand:
B. Cash in bank:
Cash and Receivables
7
Cash (contd.)

What are excluded from the cash
account (source: FRR No. 1):
Foreign currency with severe
restrictions - separate cash account.
 Certificates of deposits (CDs) Temporary Investments.
 Bank overdrafts - current liabilities (i.e.,
A/P) unless available cash is present in
another account in the same bank
(offsetting is required in this case).

Cash and Receivables
8
Cash (contd.)

What are excluded from the cash account
(source: FRR No. 1):
 Postdated checks- Receivables.
 IOUs - Receivables.
 Travel Advances - Prepaids.
 Employees’ Advances - Receivables.
 Postage stamps -Office supplies.
 Special purpose funds - Investments.
 Compensating balances - Restricted cash.
 Short-term papera (i.e., commercial paper)
- S-T investments.
a. Investments with maturity of 3 to 12 months.
Cash and Receivables
9
Restricted Cash


Compensating balances are examples
of restricted cash which may require
separate reporting.
Other restricted cash: petty cash, cash
for payroll, cash for dividends. If the
amount is material, separate reporting
is required.
Cash and Receivables
10
Compensating Balances (CB)



Cash
CB: The portion of any deposit
maintained by a corporation to
support an existing borrowing
arrangements (ASR No. 148).
CB will increase the effective interest
rate.
CB may also be payment for bank
services rendered to the company.
Cash and Receivables
11
Compensating Balances (contd.)


Cash
If the CB is significant and is to support
short-term borrowing, the CB should be
stated separately among the “cash and
cash equivalent item” in current assets..
If the CB is significant and is to support
long-term borrowing, the CB should be
classified as noncurrent assets in either
“Investments” or “ Cash on Other
Assets” using a caption such as “Deposit
Maintained as Compensating Balance”.
Cash and Receivables
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Compensating Balances (contd.)

Cash
The following two situations only require
a footnote disclosure of the CB, not a
separate reporting:
1) CB arrangement exists without agreements
that restrict the use of cash amount shown
on the balance sheet statement;
2) CB arrangement is to assure future credit
availability.
Cash and Receivables
13
Other Cash Related Topics


Electronic Fund Transfer (EFT):
Cash Equivalents: short-term, highly
liquid investments that are both
 Readily convertible to known amount
of cash, and
 So near their maturity that they
present insignificant risk of change in
value.
Cash and Receivables
14
Cash Equivalents (CEs)


In general, only investments with original
maturity of three months or less qualify
under these definitions.
Examples: Treasury bills, Commercial
paper, and Money Market Funds.
Hard lesson learned: reporting the auctionrate notes as CEs by Kohl’s and ADC
Telecommunications resulting in sizeable
write-downs of these CE during the credit
crunch due to no market exist for these
investments.
Cash and Receivables
15
Cash Equivalents (CEs)
Although these auction-rate notes often
have long maturity dates (i.e., 30-year),
they were traded on daily basis prior to the
credit crunch in 2008.
 This is how the holders of these notes
argued to present them as CEs.
 When the market for these notes froze (i.e.,
no buyers of these notes), the value of
these assets dropped significantly to
warrant a sizeable write down.

Cash and Receivables
16
Cash Equivalents (CEs)
FASB is considering to separate
reporting of cash from CEs.
 In July 2010, FASB staff proposed to
report cash equivalents (i.e., money
market fund) as short-term investments.
 This project was reassessed as a low
priority project and no action was taken
recently.

Cash and Receivables
17
Using Bank Account
 General
checking accounts
 Imprest
bank accounts
 Lockbox
Cash
accounts
Cash and Receivables
18
Cash Management and Control


Cash Management:
1)to maintain sufficient balance of cash on
hand for day-to-day operation;
2)to prevent large amount of idle cash on
hand.
Cash Control: to prevent losses of cash by
theft of fraud
1. Immediate deposit of cash.
2. Cash payment by checks except for small
amounts.
3. Separation of duties.
4. Bank account reconciliation.
Cash and Receivables
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III.Receivables


Receivables: claims held against
customers and others for money, goods
or services.
Current Receivables: expected to be
collected within one year or one
operating cycle, whichever is longer.
Cash and Receivables
20
Receivables (contd.)


Trade Receivables: amount owed by
customers for goods sold and services
rendered as part of normal business
operations (i.e., accounts receivable and
notes receivable).
Nontrade Receivables: all others (i.e.,
interest receivable, advances to
employees, deposits to cover potential
damages, etc.)
Cash and Receivables
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Balance Sheet Presentation of Receivables
(Illustration 7-3, KWW, 14th e)
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Trade Receivables

Accounts Receivable (A/R): oral
promises of the purchasers to pay for
goods sold and services rendered. They
are usually collected in 30-60 days. Thus,
A/R is always reported as a current asset
with the net realizable value (i.e., A/R
minus the allowance for uncollectible
accounts).
Cash and Receivables
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Trade Receivables (contd.)

Notes Receivable (N/R): written
promises to pay a certain sum of
money on a specific future date. N/R
can be long-term or short-term and can
be interesting-bearing or noninterest
bearing.
Cash and Receivables
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Trade Receivables (contd.)


Short-term N/R is reported at net
realizable value (face amount –
allowances for uncollectibles accounts).
Long-term N/R is reported at present
value or the fair value (i.e., the quoted
market prices of identical assets in
active markets).
Cash and Receivables
25
Valuation of A/R & N/R
Journal Entry of
Transaction
Valuation of A/R
or N/R
Adjustment(s)
1. Cash
xx
Sales
xx
2. A/R
xx
Sales
xx
No
Volume Dis.
Sales R&A
Cash Discount,
Sales R&A,
Volume Dis.,
Uncollectible Acc.
Net Realizable
Value (NRV)
3. N/R
xx
Short-Term- NRV
Sales
xx
Long-TermPresent Value or
Fair value
Cash and Receivables
Sales R&A
Uncollectible
accounts (for
short-term)
26
Adjustments Related to Sales
1. Volume Dis. (Trade Discounts)
2. Cash Discounts (Sales Discounts)
3. Sales Returns and Allowances
4. Uncollectible Accounts
Cash and Receivables
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1. Volume Discount

When to Recognize the Adjustments: Not
reflected on the J.E.
Unit price = $10
Volume Dis. => 5% if purchase 100 or more units
Sale => 200 units
J.E.:
Cash 1,900
OR A/R
1,900
Sales
1,900
Sales
1,900
Cash and Receivables
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2. Cash Discounts (Sales Discounts)

When to Recognize the Adjustments:
both Methods are acceptable.
A. Recognized at time of sale (Net Price
Method)
B. Recognized at time of occurrence
(Gross price Method)
Cash and Receivables
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2A. Recognized at Time of Sale
(Net Price Method)

Sales = $100, terms 2/10, n/30
12/26/x1 A/R
98
Sales
98
a. 1/2/x2 Cash
A/R
98
98
Cash and Receivables
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2A. Recognized at Time of Sale
(Net Price Method) (contd.)
If discounts were not taken:
b. 1/31/x2 Cash
A/R
100
Cash Discounts Not Taken


98
2
Finance charge
or Cash Dis. Forfeited
(interest revenue)
Note: If the discount period expired on 12/31,
adjustment is required to bring the A/R to the gross
amount.
Cash and Receivables
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2B. Recognized at time of occurrence
(Gross price Method)

Sales = $100, terms 2/10, n/30
12/26/x1 A/R
100
Sales
100
a. 1/2/x2
Cash
Sales Discounts
AR
If discounts were not taken:
b. 1/31/x2 Cash
A/R
Cash and Receivables
98
2
100
100
100
32
3. Sales Returns & Allowances
(FASB 48)
A. The amount of sales R&A is not
significant.
B. The amount of sales R&A is significant
and six conditions are not met.
C. The amount of sales R&A is significant
and six conditions are met.
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3A. The amount of Sales R&A
Is Not Significant

If the amount of sales R&A is not
significant, sales R&A are recognized
at time of occurrence:
Sales Returns & Allowances
A/R (or cash)
Cash and Receivables
xxx
xxx
34
3B. The Amount of Sales R&A Is Significant
and Six Conditions Are Not Met

If the amount of sales R&A is
significant, and the following six
conditions are not met, postpone the
revenue recognition until all six
conditions are met or the return period
expired.
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35
Six Conditions (SFAS No. 48)
1. Sales price is determinable or fixed;
2. Buyers have paid or have the obligation
to pay the sales price;
3. The buyer’s obligation would not be
changed due to theft or damage of the
product after purchase;
4. Sellers are not responsible for the
performance of the product;
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Six Conditions (SFAS No. 48)
5. Buyers and sellers are two separate
economic entities;
6. The amount of returns can be
estimated.
 If the amount of returns is
significant and these conditions are
not met, revenue cannot be
recognized.
Cash and Receivables
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3C. The Amount of Sales R&A Is Significant
and Six Conditions Are Met
Sales can be recognized in the period in which
the sales are made.
 Also, at the end of the same period, the
amount of sales returns would be estimated
and recognized.

10/5/x1 A/R
10,000
Sales
10,000
12/31/x1 Sales R&A
1,000
Allow. for sale R& A
1,000
(estimate 10% returns)
1/10/x2 Allowance for sales R&A
900
A/R
900
Cash and Receivables
38
4. Uncollectible Accounts
The Allowance Method for Uncollectible
Accounts: Estimate the bad debt (B/D)
expense at the end of the period and
recognize the expense (SFAS No. 5).
Adjusting entry for B/D expense:
Estimated B/D expense = $2,000

12/31 B/D Expense
2,000
Allowance for
Doubtful Accounts
2,000
When B/D actually occurred: (i.e.,$200 B/D)
Allowance for doubtful Accounts
200
A/R
200
Cash and Receivables
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4. Uncollectible Accounts (contd.)
If $100 of the B/D recovered:
A/R
100
Allow. for Doubtful Acct.
Cash
A/R
100
100
100
The current practice is complied with the
matching principle.
 The direct write-off method (recognize the
B/D expense when it occurs) is not
recommended.

Cash and Receivables
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Presentation of Allowance for
Doubtful Accounts
Cash and Receivables
41
Three Methods in the Estimation of B/D
Expense
1. Percentage-of-sales (income
statement approach).
2. Percentage-of-accounts receivable
(balance sheet approach).
3. Aging of accounts receivable (B/S
approach using individual account
information).
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42
1. Percentage-of-Sales (I/S Approach)
Example:
Net credit sales = $20,000
Estimated B/D exp. = 2% of net credit sales
Adjusting Entry
12/31 B/D Expense
400
Allow. for Doubtful Accounts
Cash and Receivables
400
43
2. Percentage of A/R
(B/S Approach)
A/R Balance = $50,000
Estimated B/D = 1% of A/R
Balance of the allow for doubtful accounts prior
to the adjustment = $300
The new balance of the allow. for doubtful
accounts = $50,000 x 1% = $500
Bad Debt Expense = $500 - 300 = 200
Adjusting Entry
B/D expense
Allowance for Doubtful accounts
Cash and Receivables
200
200
44
3. Aging of A/R Method
The balance of the allowance prior to adj.= $100
Age
Amount
B/D%
Allowance
Amount
0-30
10,000
4
400
31-60
7,000
10
700
61-90
Over 90
4,000
2,000
17
26
680
520
Total
2,300
B/D Expense= $2,300 - $100 = $2,200
Adj. Entry: B/D expense
2,200
Allowance for Doubtful Account. 2,200
Cash and Receivables
45
Earnings Management



Discretionary accruals require a large
degree of managers’ judgment
Managers can use the discretionary
accruals to manage earnings.
Examples of discriminatory accruals:
bad debt expense, warranty expense,
sales returns (when expecting sig.
returns), etc.
Cash and Receivables
46
Earnings Management Using Accruals: The
Case of Nortel
 Background: A Canadian communication
company filed bankruptcy in 2009. It was hit
very hard by the technology stock price
decline in the early 2000s.
 Accounting Scandals: Nortel overstated its
bad debt expense of 2002 in order to reduce
its bad debt expense of 2003 (thus, increase
its earnings) even though the outstanding
accounts receivables were similar for both
years.
Cash and Receivables
47
Earnings Management Using Accruals: The
Case of Nortel (contd.)
Cash and Receivables
48
Earnings Management Using Accruals –
Sun Trust Banks
 Similar to Nortel, some banks also
overstated the loan loss reserve (an
expense) for outstanding loans in a
good earnings year and reduce the
reserve in the following year to manage
earnings.
Cash and Receivables
49
Earnings Management Using Accruals –
Sun Trust Banks (contd.)
 The SEC brought action against Sun
Trust in 1999, alleging Sun Trust
manipulated its earnings by overstating
loss reserve when it was not experiencing
significant loan losses.
 The SEC required Sun Trust to reverse
the $100 million of loan loss reserve.
source: KWW,14th e, p377 and “The Mythical FDIC Fund by
William M. Isaac*, AM BKR Final, 8/27/08).
Cash and Receivables
50
Presentation of Receivables (see
Illustration 7-23 of KWW 14th e)
 General Rules :
 Segregate the different types of receivables.
 Appropriately offset the valuation accounts
against the proper receivables.
 Disclose any loss contingencies.
 Disclose any receivables pledged as collateral.
 Disclose the nature of credit risk, especially the
concentration of credit risk of receivables (i.e.,
receivable with common characteristics.).
Cash and Receivables
51
Cash and Receivables
52
Interest on Receivables

Most of the A/R does not bear interest
if the customers pay the amount within
the term period. However, if payment
is not made within the term period, the
customer may have to pay interest on
the unpaid balance.
Cash and Receivables
53
Example A

Interest on Receivables
Credit sale of $1,000 was made on
3/1/x1, terms 2/10 and n/30. Financial
charge is 1% per month on the unpaid
balance. The customer paid the first
half of the A/R on 5/1/x1 and the
second half on 6/1/x1.
Cash and Receivables
54
Example A (contd.)
Journal Entries:
3/1/x1 A/R
1,000
Sales
5/1/x1 Cash
A/R
Interest Revenue
6/1/x1 Cash
A/R
Interest Revenue
1,000
510
500
10 a
505
500
5b
a. 1% x 1000
b. (1,000-500) x 1%
Cash and Receivables
55
Example B

Interest on Receivables
Installment Sales (with Interest):
Sales Price = $1,200
CGS = $900
Sales were made on 5/1/x1, four equal
payments of $322.83 were made on 8/1/x1,
11/1/x1, 2/1/x2 and 5/1/x2 with 3% of
quarterly interest rate.
$1,200 = X  3.7171
X = $322.83
Cash and Receivables
56
Example B (contd.)

Accrual Method:
Journal Entries
5/1/x1 A/R
1,200
Sales Revenue
1,200
8/1/x1 Cash
322.83
A/R
286.83
Interest Revenue
36 1
11/1/x1Cash
322.83
A/R
295.43
Interest Revenue
27.40 2
1. 3%  1,200
2. (1,200 - 286.83)  3%
Cash and Receivables
57
Example B (contd.)
2/1/x2 Cash
322.83
A/R
304.30
Interest Revenue
18.53 1
5/1/x2 Cash
322.83
A/R
313.43
Interest Revenue
9.40 2
1. (1,200 - 286.83 - 295.43)  3%
2. (1,200 - 286.83 - 295.43 - 304.30)  3%
A/R
1,200 286.43 - 5/1/x1
295.43 - 8/1/x1
304.30 - 2/1/x2
313.43 - 5/1/x2
Cash and Receivables
58
IV. Financing with Accounts Receivable –to
accelerate the receipt of cash from receivables
Two ways:

1. Secured borrowing
 Pledge (General Assignment)
 Assign (Specific Assignment)
 2. Sale of receivables (Factoring)
 With recourse
 Without recourse

Cash and Receivables
59
IV. Financing with Accounts Receivable
(contd.)


Advantages:
1) Immediate use of cash (i.e., pledge,
assign and factor);
2) Avoid the cost of billing and collection
(i.e., factor).
Disadvantages:
1) Service charge (i.e., assign and factor);
2) Interest charge (i.e., pledge and assign)
Cash and Receivables
60
IV. Financing with Accounts Receivable
- Reasons


Pledge and Assign:
 Cash shortage and other ways of
borrowing are not available or too
expensive.
Factor:
 In some industries (i.e., durable goods),
product financing is mandatory to be
competitive. Companies in these
industries often created wholly-owned
subsidiaries specializing in receivables
financing.
Cash and Receivables
61
IV. Financing with Accounts Receivable
– Reasons (Contd.)

Factor (cont.):
To avoid billing and collection costs.
 To avoid violation of existing lending
agreements.
 From a purchaser’s point of view,
buying receivables may be an
alternative of making profits when
reaching its legal lending limit.
Note: Credit card sale is a form of factor
without recourse.


Cash and Receivables
62
Pledge of A/R
(General assignment of A/R)

Pledge of A/R:
Use A/R as a security (collateral) to
borrow money from financial
institutions.
No journal entries are required for the
pledge. Information related to the
pledge is disclosed in the footnote.
Cash and Receivables
63
Pledge of A/R
Example

Borrow $100,000 by pledging all
receivables for the borrowing:
Journal Entry:
Cash
Notes Payable
100,000
100,000
Notes: The company’s trade accounts are
pledged as collateral for the $100,000 notes
payable
Cash and Receivables
64
Pledge of A/R
Example (contd.)

When the note is due and paid, the
following entry will be recorded:
Notes Payable
100,000
Interest Expense
3,000
Cash
103,000

Assume a 12% interest and a 3-month
duration.
Cash and Receivables
65
Pledge of A/R
Example (contd.)


If the note is not paid on the maturity
date, the lending institution can seize
and collect the pledged A/R.
The borrower (the company) continues
to have the control of the A/R. Cash
used to pay off the note can be from
any sources including proceeds
received from the pledged A/R.
Cash and Receivables
66
Assignment of Accounts Receivable
(specific)



Use A/R as a means to borrow money
from banks or financial institutions.
Specific A/R are assigned as collateral
for the borrowing.
Companies (the borrowers) continue to
have the control of the A/R assigned
and continue to collect assigned A/R
from the customers.
Cash and Receivables
67
Assignment of Accounts Receivable
(contd.)



The amount collected from the assigned
A/R must be remitted to the lending
institution periodically.
The proceeds collected from the assigned
A/R cannot be used for any other
purposes until all loans are paid off.
The lender usually charges: 1) a service
charge (i.e., 5% of the loan amount), 2)
interest on the loan.
Cash and Receivables
68
Example of (Specific) Assignment
(Illustration 7-16 of KWW , 14th e with little
modification for April collections.)

On March 1, 2010, Howat Mills Inc. (HM),
assigns $700,000 of its accounts receivable to
Citizens Bank as collateral for a $500,000
borrowing. HM continues to collect the A/R; the
account debtors are not notified of the
assignment (a non-notification assignment).
Citizens Bank charges a finance charge of 1%
of the A/R assigned. The annual interest on the
note is 12%. Settlement by HM to the bank is
made monthly for all cash collection on the
assigned receivable.
Cash and Receivables
69
Example of Assignment (contd.)
Howat Mills Inc
Citizens Bank
Issuance of note and assignment of A/R on 3/1:
Cash
493,000
Interest Exp.
7,000
Notes Payable
500,000 N/R
500,000
A/R Assigned 700,000
Cash
493,000
A/R
700,000
Interest Revenue
7,000
Collection in March of $440,000 of assigned A/R less cash
discounts of $6,000. Sales returns of $14,000 were received.
Cash
434,000
Cash Discounts 6,000
No Entry
Sales Returns
14,000
A/R Assigned
454,000
Cash and Receivables
70
Example of Assignment (contd.)
Howat Mills Inc
Citizens Bank
Remitted March collections plus accrued interest ($500,000 x
0.12 x 1/12 = 5,000) to the bank on 4/1:
Interest Exp.
5,000
Cash
439,000
Notes Payable 434,000
Interest Rev.
5,000
Cash
439,000
N/R
434,000
Collection in April of $144,000 of assigned A/R and $2,000
write-off as uncollectible:
Cash
144,000
Allow. for
No Entry
Doub. Acct.
2,000
A/R Assigned
146,000
Cash and Receivables
71
Example of Assignment (contd.)
Howat Mills Inc
Citizens Bank
Remitted the balance due of 66,000 ($500,000-434,000) plus
interest on May 1 ($66,000 x 0.12 x 1/12)
Notes Payable 66,000
Cash
66,660
Interest Exp.
660
N/R
66,000
Cash
66,660
Interest Rev.
660
To transfer the remaining A/R assigned to A/R when the loan
is paid off:
A/R
100,000
A/R Assigned
100,000
No Entry
Cash and Receivables
72
An Alternative: Accounts Receivable Are
Not Transferred to A/R Assigned
Howat Mills Inc
Citizens Bank
Issuance of note and assignment of A/R on 3/1:
Cash
493,000
Interest Exp.
7,000
Notes Payable
500,000 N/R
500,000
Cash
493,000
Interest Revenue
7,000
Collection in March of $440,000 of assigned A/R less cash
discounts of $6,000. Sales returns of $14,000 were received.
Cash
434,000
Cash Discounts 6,000
No Entry
Sales Returns
14,000
A/R
454,000
Cash and Receivables
73
Accounts Receivable are Not
Transferred to A/R Assigned (cont)
Howat Mills Inc
Citizens Bank
Remitted March collections plus accrued interest ($500,000 x
0.12 x 1/12 = 5,000) to the bank on 4/1:
Interest Exp.
5,000
Cash
439,000
Notes Payable 434,000
Interest Rev.
5,000
Cash
439,000
N/R
434,000
Collection in April of $144,000 of assigned A/R and $2,000
write-off as uncollectible:
Cash
144,000
Allow. for
No Entry
Doub. Acct.
2,000
A/R
146,000
Cash and Receivables
74
Accounts Receivable are Not
Transferred to A/R Assigned (cont.)
Howat Mills Inc
Citizens Bank
Remitted the balance due of 66,000 ($500,000-434,000) plus
interest on May 1 ($66,000 x 0.12 x 1/12)
Notes Payable
66,000
Cash
66,660
Interest Exp.
660
N/R
66,000
Cash
66,660
Interest Rev.
660
To transfer the remaining A/R assigned to A/R when the loan
is paid off:
No Entry
No Entry
Cash and Receivables
75
Example of Assignment (contd.)

The balance sheet statement of HM on 4/1
after the remittance of $434,000 cash collected
from A/R Assigned in March, the balance of
the A/R assigned account is $246,000
($700,000 - $454,000) and the balance of the
Notes Payable account is $66,000 ($500,000$434,000). These two accounts will be
presented on the balance sheet statement as :
Current Assets:
Accounts Receivable Assigned $246,000
Notes Payable
(66,000)
Equity in A/R Assigned
$180,000
Cash and Receivables
76
Sale (Factor) of Accounts Receivable


A common type of sale of A/R is a sale
to a factor.
Factors are finance companies or banks
that buy receivables from businesses for
a fee and then collect the receivables
directly from the customers.
Cash and Receivables
77
Sale (Factor) of Accounts Receivable



In the case of factor, A/R would be
transferred to the purchaser.
The buyer would collect the accounts,
not the seller.
The seller relinquishes all rights
pertaining to the future collection of A/R.
Cash and Receivables
78
Sale (Factor) of A/R (contd.)



Sale of A/R (commission is 0.75% to 1.5%) is
a common practice in some industries
such as textile, apparel, footwear,
furniture, etc.
For some industries, sales financing is
necessary in order to be competitive.
Credit card transaction is also a type of
factoring arrangement (commission is 4 to
5%).
Cash and Receivables
79
Sale (Factor) of A/R (contd.)



Credit Card Sale (Contd.)
The buyer (the card issuer) of the
receivable charges the seller (the
merchant) a commission for the
receivables purchased.
The buyer collects directly from
customers (card holder).
Cash and Receivables
80
Accounting for Factor


Factor without recourse
Factor with recourse
Recourse is a right of a buyer of
receivables to receive payments from
the seller when debtors fail to pay.
Cash and Receivables
81
Factor without Recourse (A Sale of
Receivables)


In the case of factor without recourse,
the buyer assumes the risk of
uncollectibility and absorbs any credit
losses (i.e., bad debts).
Thus, factor without recourse is a sale
of receivables both in form and in
substance.
Cash and Receivables
82
Example of Factor without Recourse
(Source: Illustrations 7-18 Kieso, etc. textbook with some
modifications.)

Crest Textiles factors $500,000 of A/R with
ABC Bank on a without recourse basis. The
receivables are transferred to ABC bank on
5/1. ABC bank charges 3% of financial
charge for factor without recourse and retain
an amount equals to 5% of the A/R to cover
sales returns and discounts. Credit losses
(bad debts) are absorbed by ABC bank due to
factor without recourse. The ABC bank
expects $4,100 of uncollectible accounts from
the receivables purchased.
Cash and Receivables
83
Example of Factor without Recourse
(contd.)
Crest Textiles
5/1
Cash
460,000
Due from
Factor
25,000
Loss on Sale
of Rec.
15,000
A/R
500,000
ABC Bank
A/R
500,000
Due to
Crest Texti.
25,000
Interest Rev.
15,000
Cash
460,000
Recognition of Bad Debt
Exp.:
Bad Debt Exp. 4,100
Allow. For
Doub. Acct.
4,100
Cash and Receivables
84
Example of Factor without Recourse
(contd.)
Crest Textiles
ABC Bank
Transactions in May and June: collects of $483,800 by ABC
bank; sales R&A of $9,500; sales discounts taken of $2,600
and $4,100 bad debts written off by ABC bank.
.
Cash
483,800
Sales R&A 9,500
Due to
Sales Dis. 2,600
Crest Texti.12,100
Due from
A/R
495,900
Factor
12,100
Allow. for
Doub. Acct. 4,100
A/R
4,100
Cash and Receivables
85
Example of Factor without Recourse
(contd.)
Crest Textiles
ABC Bank
Final settlement between Crest Text and ABC Bank:
Cash
12,900
Due to
Crest Texi 12,900
Due from
Factor
12,900
Cash
12,900
Note: The factor’s (ABC Bank) income from this factor
is $15,000 - 4,100 (Interest revenue – bad debt
expense).
Cash and Receivables
86
Factor with Recourse (source: Kieso, etc.
textbook)


When receivables are sold with
recourse, the seller “guarantees
payment to the buyer in the event the
debtor fails to pay” (or the payment of
the debtor is less than expected by the
purchaser).
Thus, the seller retains the risk of
uncollectibility.
Cash and Receivables
87
Factor with Recourse

SFAS No. 140 requires that a sale of
receivables with recourse be recognized
as a sale only if all three conditions are
met, otherwise, the sale with recourse
should be treated as a secured
borrowing.
Cash and Receivables
88
Three Conditions
Factor with Recourse
1. The transferred assets have been isolated
from the transferor (beyond the reach of
the seller and its creditors);
2. Each buyer (transferee) has the right to
pledge or exchange the assets it received
and no constrains attached;
3. The seller does not maintain effective
control over the transferred assets through
repurchase agreement.
Cash and Receivables
89
Factor with Recourse (Contd.)
 A recourse is an example of “continuing
involvement” in a transfer of receivables
 In the case of factor with recourse and
meeting all three criteria, the transaction will
be recorded as a sale with the recognition of
assets obtained and liabilities expected.
 The buyer (transferee) usually charges a
higher fee in the case of factor without
recourse than in the case of factor with
recourse.
Cash and Receivables
90
Example of Factor with Recourse
(Source:
illustrations 7-18, 7-19 and 7-20 of Kieso, etc.
textbook)
 Crest Textiles factors $500,000 of A/R with
ABC Bank on a with recourse basis. The
receivables are transferred to ABC Bank on
5/1. ABC Bank charges 3% of financial
charge for factor with recourse and retains
an amount equals to 5% of the A/R to cover
sales returns and discounts. Credit losses
(bad debts) are absorbed by Crest Textiles,
Inc. due to factor with recourse. The Crest
Textiles, Inc. expects $6,000 of uncollectible
accounts from the receivables factored.
Cash and Receivables
91
Factor with Recourse : Example (Contd.)
– All Three Conditions Are Met and Treated As a Sale
Crest Textile
Cash
460,000
Due from Factor 25,000
Loss on Sale
of Receivable
21,000*
A/R
500,000
Recourse Liability 6,000
ABC Bank
A/R 500,000
Due to 25,000
Crest
Interest
Rev.
15,000
Cash
460,000
*$21,000= $500,000x3% +6000
or
Net Proceeds = $460,000+25,000
-6000=479,000.
$21,000 = $500,000 – 479,000
Cash and Receivables
Example of Factor with Recourse
(contd.)
Crest Textiles
ABC Bank
Transactions in May and June: bad debts occurred, $6,000;
sales R&A occurred,$9,500; sales discounts taken, $2,600. The
A/R collected, $481,900 (i.e., $500,000-12,100-6000).
.
Cash
481,900*
Sales R&A 9,500
Due to
Sales Dis. 2,600
Crest
12,100
Due from
A/R
494,000
Factor
12,100
Due to Crest 6,000
Recourse Liability 6,000
A/R
6,000
Due from Factor 6,000 *500,000-12,100-6,000
Cash and Receivables
93
Example of Factor with Recourse
(contd.)
ABC Bank
Crest Textile
(Treated as a Sale)
Settlement between Crest and ABC
6,900a
Cash
Due from Factor 6,900
Due to Crest 6,900
Cash
6,900
a. $6,900 is $6,000 less than $12,900 in the case of
factor without recourse. This is due to the bad
debt amount $6,000 is absorbed by Crest Textile
in the case of factor with recourse.
Cash and Receivables
94
What if only $5,000 bad debts occurred in stead
of the expected $6,000 in factor with recourse
example on p78?
Crest Textiles
ABC Bank
Transactions in May and June: bad debts occurred, $5,000;
sales R&A occurred,$9,500; sales discounts taken, $2,600.
A/R collected, $482,900 (*500,000-12,100-5,000).
.
Cash
482,900*
Sales R&A 9,500
Due to
Sales Dis. 2,600
Crest
12,100
Due from
A/R
495,000
Factor
12,100
Due to Crest 5,000
Recourse Liability 6,000
A/R
5,000
Due from Factor 5,000
Loss on Sale of Rec. 1,000
Cash and Receivables
95
What if only $5,000 bad debts occurred
(contd.) :
ABC Bank
Crest Textile
(Treated as a Sale)
Settlement between Crest and ABC
7,900a
Cash
Due from Factor 7,900
Due to Crest 7,900
Cash
7,900
a. $7,900 is $5,000 less than in the case of factor
without recourse. This is due to the bad debt
amount $5,000 is absorbed by the seller (Crest
Textile) in the case of factor with recourse.
Cash and Receivables
96
The Profits of the Buyer (Transferee)under
Factor With Recourse



Unlike factor without recourse, the profits for
the buyer in the factor with recourse always
equal the interest revenue (i.e., $15,000 in
the above examples) due to bad debts being
covered by the seller . Using previous
examples:
When bad debts=$6,000, the profits of ABC
= $489,100-$460,000-$6,900 =$15,000.
When bad debts =$5,000, the profits of
ABC=$482,900-460,000-7,900=$15,000.
Cash and Receivables
97
V. Notes Receivable
Note receivable: A written promissory
note; can be interest bearing or noninterest bearing.
 Short-term N/R: Recorded at the
amount expected to be collected (i.e.,
NRV).
 Interest bearing: Accrued interest
recognized at the end of a period.
 Non-interest bearing

Cash and Receivables
98
Notes Receivable (contd.)

Long-term N/R:
1. Recorded at net present value
2. End of period valuation –NPV or the
fair value (SFAS 159)
Note: Reporting a long-term note receivable
at the fair value is an option. Once chose,
the fair value method will be used for all
subsequent periods.
Cash and Receivables
99
Notes Receivable
Case I: Non-Interesting Bearing Example

Receiving a 3 month non-interest bearing note
on 11/1/x1 with a face amount of $10,000.
11/1/x1 N/R
10,000
Sales
10,000
12/31/x1 No adjusting entry for accrued interest
because the note is a non-interest bearing note.
1/31 Cash
10,000
N/R
10,000
If the note is dishonored on 1/31 =>
A/R
10,000
N/R
10,000
Cash and Receivables
100
Notes Receivable
Case II: Interesting Bearing Example

Short-term note with interest bearing;
annual interest rate = 12%.

Receiving a 3-month interest bearing
note on 11/1/x1. Face amount is
$10,000 and the annual interest rate is
12%
Cash and Receivables
101
Case II (contd.)
11/1/x1 N/R
10,000
Sales
10,000
12/31/x1 Interest Receivable
200
Interest Revenue
200
1/1/x2 Reversing Entry:
Interest Revenue
200
Interest Receivable
200
1/31/x2 Cash
10,300
N/R
10,000
Interest Revenue
300
Cash and Receivables
102
Discount of Notes
(to a bank or to any finance institution)

Example: A 3-month note with a face
amount of $10,000 (received on 11/1/x1)
is discounted on 12/1/x1.
Interest rate of the note = 12% (annual)
Int. rate charged by the bank = 18% (annual)
Cash and Receivables
103
Discount of Notes (contd.)
1. Maturity value of the note
= $10,000 + 10,000  12%  3/12
= $10,300
2. Interest charged by the bank (discount)
= $10,300 x 18% x 2/12 = $309
1/31/x2
12/1/x1
11/1/x1
Bank is receiving
$10,300 on
1/31/x2
Bank is lending
$10,300 on
12/1/x1
Cash and Receivables
104
Discount of Notes (contd.)

Proceeds received by the firm from
discounting the note (the bank will
deduct the interest charge from the
proceeds):
$10,300 - 309 = $9,991
Cash and Receivables
105
Discount of Notes (contd.)
J.E. on 12/1:
Cash
Loss on Dis. of Note
N/R Discounted
Interest Revenuea
9,991
109
10,000
100
a.Interest earned by the firm from holding the note
for one month (11/1 ~ 12/1) = $10,000  12% 
1/12 =100
Footnote (FASB): Contingent liability of
discounted note of $10,000
Cash and Receivables
106
Discount of Notes (contd.)

On 1/31/x2, the note is paid, the following
entry will be recorded:
N/R discounted
10,000
N/R
10,000
If on 1/31/x2, the note is dishonored, the
following entry will be recorded:
(Assuming the bank charge $10 fee)
N/R Discounted
10,000
Loss on Dishonored Note
10,310
N/R
10,000
Cash
10,310
Cash and Receivables
107
Long-Term Notes Receivable
Initial Recording: Net present value
End of Period: Net present value or
the fair value.
Cash and Receivables
108
Long-Term N/R
Example A

Receiving a 2-year note on sales of
goods on 1/1/x1. The face amount of this
note is $100,000 and the annual interest
of the note is 10%. The interests are
paid annually and the market interest rate
is 12%. Present value of the note:
$100,000  0.79719 + 10,000  1.69005
=96,620
Cash and Receivables
109
Example A (contd.)
Long-Term N/R
1/1/x1
Notes Receivable
100,000
Sales Revenue
96,620
Discounts on N/R
3,380
 Effective
Interest of 20x1
= PV of note on 1/1/x1  12%
= ($100,000 - 3,380)  12%
= 11,594.4
Cash and Receivables
110
Example A (contd.)
Long-Term N/R
12/31/x1 (recording receiving of $10,000
interest)
Cash
10,000
Discount on N/R
1,594.4
Interest Revenue
11,594.4
P.V. of the note on 1/1/x2
= 100,000 - (3,380 - 1594.4) = 98,214.4
 Effective Interest of 20x2 = PV on 1/1/x2  12%
= 98,214.4  12% = 11,785.7
Cash and Receivables
111
Example A (contd.)
Long-Term N/R
12/31/x2 (recording int. received on 12/31/x2):
Cash
10,000
Discount on N/R
1,785.7
Int. Revenue
11,785.7
12/31/x1 (recording face amount of N/R
received on maturity date):
Cash
100,000
N/R
100,000
 Discount
on N/R has been amortized to zero
after two years of amortization using the
effective interest method.
Cash and Receivables
112
Example B: Notes Received for
Property, Goods and Services

Example: Lenex sold a lot to Impex as
an office site. Lenex accepted a 3-year
note with a maturity value of $ 93,169
and with no stated interest rate. The
land originally cost Lenex $30,000 and
had an appraised fair value of $70,000
on the selling date.
Cash and Receivables
113
Notes Received for Property, Goods
and Services (contd.)
J.E.:
N/R
93,169
Dis. on N/R
Land
Gain
23,169
30,000
40,000
 When the market interest rate is unknown, the
imputed interest rate is calculated as:
 $70,000 = $93,169 x ?
 ? = 70,000/93,169 = 0.7513
 0.7513 is the present value factor of 10%, 3
periods and therefore, the imputed interest rate
is 10%.
Cash and Receivables
114
Notes Received for Property, Goods
and Services (contd.)
 The discount on N/R will be amortized in the
next three years as follows:
Discount on N/R
.
Interest Revenue
Year 1
Year 2
Year 3
7,000
7,700
8,469
7,000
7,700
Cash and Receivables
8.469
115
Notes Received for Property, Goods
and Services (contd.)
 If the effective rate of the note is known, the
present value of the note will be calculated
using the effective interest .
 The gain will be the difference between the
P.V. of the note and the cost of the land.
 The discount amount will be the difference
between the maturity value (i.e., $93,169)
and the P.V. of the note.
Cash and Receivables
116
Example B (skip p114-121)

Long-Term N/R
On 12/31/x1 La Tourette Inc. rendered services to
Husky Corp. at an agreed price of $73,844.10,
accepting $18,000 down and agreeing to accept
the balance in four equal installments of $18,000
receivable each 12/31. An assumed interest rate of
11% is imputed. Record the journal entries for La
Tourette for the sale and for the receipts and
interest on the following dates:
1. 12/31/20x1
2. 12/31/20x2
3. 12/31/20x3
4. 12/31/20x4
5. 12/31/20x5
Cash and Receivables
117
Example B (contd.)
Long-Term N/R
PV of $18,000 annuity @11%, four payments
= 18,000  3.10245 = 55,844.10
Thus, the revenue from the services
= 18,000 + 55,844.10 = 73,844.10
12/31/x1
Cash
18,000
Notes Receivable
72,000
Discount on N/R
16,155.9a
Revenue from Services
73,844.10

a. (18,000  4) - 55,844.10 = 16,155.9
Cash and Receivables
118
Example B (contd.)
Long-Term N/R
12/31/x2 (recording install. Payment of $18,000
and the amortization of discount on N/R):
Cash
18,000
N/R
18,000
Discount on N/R
6,142.85
Interest Revenue
6,142.85a
a. Interest Revenue of 20x2
= pv of note on 1/1/x2 (or 12/31/x1)  11%
= 55,844.1  11% = 6,142.85
Cash and Receivables
119
Example B (contd.)
Long-Term N/R
12/31/x3
Cash
18,000
N/R
18,000
Discount on N/R
4,838.56
Interest Revenue
4,838.56a
a. Interest Revenue of 20x3
= pv of note on 1/1/x3  11%
= (55,844.1 - 18,000 + 6,142.85)  11%
= 43,986.95  11% = 4,838.56
Cash and Receivables
120
Example B (contd.)
Long-Term N/R
12/31/x4 (recording install. Payment of 18,000
and the amortization of discount on N/R):
Cash
18,000
N/R
18,000
Discount on N/R
3,390.81
Interest Revenue
3,390.81a
a. Interest Revenue of 20x4
= pv of note on 1/1/x4  11%
= (43,986.95 - 18,000 + 4,836.56)  11%
= 30,825.51  11% = 3,390.81
Cash and Receivables
121
Example B (contd.)
Long-Term N/R
12/31/x5
Cash
18,000
N/R
18,000
Discount on N/R
1,783.68
Interest Revenue
1,783.68a
a. Interest Revenue of 20x5
= pv of note on 1/1/x5  11%
= (30,825.51 - 18,000 + 3,390.81)  11%
= 16,216.31  11% = 1,783.68
Cash and Receivables
122
Notes Received for Cash and
Other Rights

Avon Co. accepts a 3-year, $100,000,
zero-interest-bearing note from Andrew
Co. plus the right to purchase 50
machines at a bargain price in
exchange for $100,000 in cash.
Assume that the current rate is 10%
(for a similar note without the right):
Cash and Receivables
123
N/R Received for Cash and
Other Rights (contd.)

J.E. for Greene:
N/R
100,000
Prepaid Purchase
24,868
Cash
100,000
Discount on N/R
24,868

The $24,868 will be amortized as interest
revenue in next 3 years. The prepaid purchase
will be amortized (proportionally to 50
machines) to increase the purchase price of
machines.
Cash and Receivables
124
Fair Value Option (SFAS 159 or
ASC825-10-25)
 Companies may choose the fair value option
when the financial instrument is originally
recognized or when an event triggers a new
basis of accounting (i.e., acquisition).
 Once chosen, the company has to use the
fair value option in subsequent periods.
 If the company does not elect the fair value
option for the financial instrument at the initial
recognition, it may not use this option for the
instrument in subsequent periods.
Cash and Receivables
125
Fair Value Option – An Example
 Assume that Loftus Company has notes
receivable with a fair value of $70,000 and a
carrying amount of $58,000 (e.g. with
$60,000 face amount and $2,000 discount on
N/R) on 12/31/2011. The company chose
the fair value option for these receivables on
the first valuation of these recently acquired
receivables.
 Adjusting Entry:
Fair Value Adjustment-N/R 12,000
Unrealized holding gain or loss* 12,000
* Reported in the income
statement
Cash and Receivables
126
Fair Value Option – An Example
 For all subsequent periods, the change in
fair value of the note will be reported as an
unrealized holding gain or loss.
 For example, assuming the fair value of
the note at December 31, 2012 is
$65,000, Loftus will record the following
adjusting entry on 12/31/2012:
Unrealized holding gain or loss 5,000
Fair Value Adj. – N/R
5,000
Cash and Receivables
127
Impairment Measurement and Reporting
on Investment in Loan Receivables



A loan receivable impaired when it is
probable that it will not collect all amounts
due (both principle and interest).
Measurement:
Compare the recorded investment (i..e,
the NRV or the carrying amount) with the
present value of the expected future cash
flows using the historical expected
interest rate.
128
Impairment Measurement and Reporting
(contd.)




Example (illustration 7B-3 onP355 of
KWW textbook):
Carrying amount of investment
$100,000
The PV of expected future cash flows
on the investment at 10% historical
effective interest rate is $87,566.
The loss on impairment = 100,000 –
87,566 = 12,434.
129
Impairment Measurement and Reporting
(contd.)

Recording of impairment losses:
Bad Debt Expense 12,434
Allowance for Doubtful Accounts 12,434

Write-off of impaired receivables:
Allowance for Doubtful Accounts 12,434
Notes Receivables
12,434
130
Securitization


A sale of securities (i.e., bonds or
commercial paper) backed
(collateralized ) by a pool of assets.
These assets can be mortgage
receivables (i.e., mortgage-backed
securities), consumer loans (i.e.,
assets-backed securities), and
corporate bonds (i.e., collateralized
debt obligations).
Cash and Receivables
131
Securitization (contd.)



Securitizations are popular for two
reasons:
1. Investors have a strong appetite in
acquiring collateralized securities.
2. Companies and lenders with large
amounts of receivables have
incentives to engage in securitization.
132
Securitization Performed by The
Company



When a company uses its assets (i.e.,
auto loan receivables) as collaterals to
issue bonds (i.e., assets-backed
securities), the receivables will remain
on its balance sheet.
The company’s liability will be increased
from the increase of bonds payable.
As a result, this transaction will have an
adverse effect on its return on assets
and debt/equity ratios.
133
The Special Purpose Entity


A special purpose entity (SPE) is
usually created by a third party (referred
to as a sponsor) which is independent
of the company with receivables
(referred to as the transferor).
The SPE serves the purpose of buying
receivables from the transferor and
issuing securities collateralized on the
receivables transferred from the
transferor.
134
The Special Purpose Entity
(contd.)

The SPE can be in the form of a trust,
partnership or corporation and is
legally distinct from the transferor.
135
Procedures of Securitization
Performed by A SPE
1. The transferor will first transfer its
receivables to the SPE.
2. The SPE issues securities (i.e.,
commercial paper due in 30-60 days)
collateralized on receivables
transferred.
3. The cash received by the SPE from
issuing securities goes back to the
transferor to pay off the receivables
transferred.
136
Procedures of Securitization
Performed by A SPE (contd.)



The SPE is served as a “pass
through”.
The sponsor of the SPE charges the
transferor fees for creating and
operating the SPE.
The transferor can continue to service
the loan for a fee.
137
Off Balance Sheet Financing


SFAS 140 (2000): If the SPE is a
qualifying SPE* ,the transferor does not
have to consolidate the balance sheet
of the SPE.
As a result, both the receivables and
the liabilities from issuing securities will
appear only on the balance sheet of the
SPE, not the transferor or the sponsor.
*The SPE has at least 3%
(10% under FIN 46 (R)) of the
fair value of its total assets invested by a third party.
138
Off Balance Sheet (B/S)
Financing (contd.)


With a qualifying SPE, the transferor
obtain an off-balance sheet financing.
Problems Associated with off B/S
financing:
 If the receivables defaulted, the
transferor may be forced to take back
receivables or the banks eat losses.
 A mismatch of long-term assets with
short-term borrowing on the capital
structure of the SPE.
139
Subprime Mortgage Crisis in
2007


Many of the subprime mortgage
receivables defaulted in 2007 due to the
reckless lending in the early to mid2000s.
When investors realized that the
underlying assets for the SPEs’
securities were subprime mortgage
receivables, SPEs had a hard time to
issue new commerce paper to refinance
the existing commercial paper.
140
Subprime Mortgage Crisis in
2007 (contd.)


As a result, many sponsors (i.e.,
banks) of the SPEs had to pay off the
commercial paper issued by the
SPEs when it matures due to the
agreements with the transferors.
These banks would, therefore, take
these subprime mortgage receivables
into their balance sheets.
141
Subprime Mortgage Crisis in
2007 (contd.)

The banks would subsequently
recognize losses (i.e., impairment
loss on the subprime mortgage
receivables) on these receivables.
142
SFAS 166 and SFAS 167


The concept of qualifying SPE is
eliminated by SFAS No.166 issued in
June 2009, and became effective as of
the beginning of the first annual
reporting period beginning after Nov.
2009 (i.e., January 2010).
SFAS 167 redefine variable interest
entity and the assessment method in
determining the primary beneficiary.
143
Consolidation of SPEs (source: KWW
textbook , appendix 17B and FIN 46 ( R)).

Based on FIN 46 (R) (2003), a SPE is a
variable interest entity (VIE ) when
 1)
wirth insufficient equity (i.e., thinly
capitalized), or
 2)
with equity holders cannot make
decisions, or
 3)
with equity holders have inproportionate controlling interest (i.e.,
holding 60% of voting rights but receiving 20% of
benefits).
144
Consolidation (contd.) (source: KWW
textbook , appendix 17B and FIN 46 ( R)).


Once an entity is identified as a VIE, a
risk-and-reward model, not the
voting-interest-model, is used in
determining the consolidation party.
The voting-interest-model: the party
with more than 50% of voting rights of
an entity should consolidate the entity
(ARB 51).
145
Consolidation (contd.) (source: KWW
textbook , appendix 17B and FIN 46 ( R)).

The risk-and-reward model of FIN 46
(R ): the party who assumes majority
of the risks and receive majority of
benefits associated with the entity is
the primary beneficiary party and
should consolidate the entity.
146
Avoiding Consolidation under
FIN 46 ( R )


A SPE with at least 10% of the fair
value of the total assets invested by a
third independent party is considered
not thinly capitalized and is a
qualifying SPE, not a VIE, under
FIN46 (R).
A qualifying SPE is not subject to
consolidation by the sponsor or
transferor under FIN 46 ( R).
147
IFRS Insights (Source: KWW 14th e, p428-429)
 The accounting on reporting related to cash
and cash equivalent is essentially the same
under both IFRS and GAAP except for the
reporting of bank overdrafts, reported as
cash under IFRS.
 The allowance for doubtful accounts
sometimes refers as provisions for doubtful
accounts.
 The fair value option is similar under GAAP
and IFRS but not identical.
Cash and Receivables
148
IFRS Insights (contd.)
 IFRS and GAAP differ in the criteria used to
account for transfers of receivables.
 IFRS focused on risks and rewards and loss
of control while GAAP uses loss of control as
the primary criterion.
 Also, IFRS allows partial transfer, GAAP
does not.
Cash and Receivables
149