Receivables
Loans and Receivables
Definition
These are non-derivative financial assets with fixed or determinable payments that are not
quoted in an active market.
Characteristics
 They have fixed or determinable payments
 They may or may not have a fixed or determinable payments
 They are not quoted in the active market
 The holder can recover substantially all of its investment unless there has been a credit
deterioration
 The holder does not have a demonstrated positive intention and ability to hold them to maturity
Concept of Receivables
 Financial assets that represent a contractual right to receive cash or another financial asset from
another entity
 Can be classified as trade and non-trade receivables
 Trade receivables are claims arising from sale of goods and services in the ordinary course of
business. Usual types are accounts receivable and notes receivable. These receivables that are
expected to be realized within the normal operating cycle or one year, whichever is longer is
treated as current assets.
 Non-trade receivables are claims coming from any activity other than the ordinary course of
business. These kinds of receivables that are expected to be realized within one year is classified
as current assets.
Customers’ Credit Balance
 The credit balance on a client’s account should not form part of receivables but rather as part
of current liabilities.
Initial Measurement of Receivables
 Financial assets must be measured at fair value plus transaction cost directly attributable to the
acquisition. Based on different cases, the fair value may be:
o Face value
o Present value
Subsequent Measurement of Receivables
 Receivables are measured at amortized cost using the effective interest method.
Subsequent Measurement of Accounts Receivable
 Accounts receivable is subsequently measured at net realizable value. To determine the NRV,
the following may be deducted from the original cost:
o Allowance for freight charge
o Allowance for sales returns
o Allowance for sales discount
o Allowance for Doubtful Accounts
Methods of Recording Doubtful Accounts
 Direct Write-off Method
 Allowance Method
o Percentage of Sales (Credit Sales)
o Percentage of Receivables
o Aging of Receivables
 Note that the classification of the doubtful accounts expense can be either distribution cost or
administrative cost depending on who approves or grants the credit.
Loans Receivable
 The initial carrying amount of the loan is based on the actual principal amount plus or minus
origination fees.
 Origination fees received from the borrower or those fees directly attributable to the borrower
are recorded as unearned interest income and amortized using the effective interest method.
 Origination fees not directly attributable to the borrower or those known as origination costs are
also amortized using the effective interest method.
 For easier accounting, the direct origination costs are deducted from the origination fees
received from the borrower.
 Origination fees may cause the effective interest to be different than that of the interest
provided. Therefore, additional computations are needed to arrive at the correct effective
interest.
Impairment of Loans
 Loan impairment may be caused by market conditions or borrower capacity issues such as
bankruptcy or breach of contract.
 Loan impairment is computed by deducting the present value of estimated future cash flows
using the original effective rate of the loan from the carrying amount of the loan.
Receivable Financing
 It is the act by an entity of raising cash out of its receivables.
 It may be in the form of:
o Pledging
o Assignment
o Factoring
o Discounting
 Pledging is simply the act of using receivables collateral to borrow money from the bank. Upon
collection of pledged receivables by the borrower, the proceeds are used to pay back the
lender.
 Assignment is a more formal type of pledging. Particular accounts receivable are used as
collateral to loans and such may be on a notification or a non-notification basis. Collections are
applied to the loan amount. The difference between the balances of the assigned receivables
and the loan is known as the “equity in assigned accounts” which is to be disclosed on the notes
to the FS.
 Factoring is basically the sale of accounts receivable on a “without recourse notification basis”.
It can be done as a casual factoring or factoring as a continuing agreement.
 Discounting is basically the endorsement of receivables to a bank before its maturity which may
be on a “with recourse” or a “without recourse” basis. If the problem is silent, the discounting is
on a “with recourse” basis. If discounting is on a with recourse basis, it can be accounted for as
either a conditional sale or a secured borrowing.