CHAPTER 4

ACCOUNTS RECEIVABLE

Receivables are financial assets that represent a contractual right to receive cash or
another financial asset from another entity.

TRADE AND NONTRADE RECEIVABLES

 Trade receivables refer to claims arising from sale of merchandise or services in

the ordinary course of business. It includes accounts receivables and notes
receivables.

 Accounts receivable are open accounts arising from the sale of goods and
services in the ordinary course of business.

 Notes receivable are those supported by formal promises to pay in the form of
notes.

 Nontrade receivables represents claims arising from sources other than the sale
of merchandise and services in the ordinary course of business.

CLASSIFICATION ( PAS 1, paragraph 66)

 Trade receivables are classified current assets if it is expected to be realized in

cash within the normal operating cycle, whichever longer.

 Nontrade receivables are also classified as current assets if it is expected to be

realized in cash within one year, the length of the operating cycle not
withstanding. If collectible beyond one year, these are classified as non current
assets.

PRESENTATION

 Trade receivables and Nontrade receivables which are currently collectible shall
be presented on the face of the balance sheet as one line item called trade and
other receivables. However, the details comprising it shall be disclosed in the
notes to financial statements.

EXAMPLES OF NONTRADE RECEIVABLES

1. Advances to or receivables from 7. Accrued Income

2. Advances to affiliates 8. Claims receivable
3. Advances to suppliers
4. Subscription receivables
5. Creditor’s accounts
6. Special deposits
Customer’s Credit Balances
 Customer credit balances are credit balances in accounts receivable resulting
from over payments, returns, allowances, and advance payments from
customers.

INITIAL MEASUREMENT

 PFRS 9, paragraph 5.1.1, provides that a financial asset shall be recognized

initially at fair value plus transaction costs that are directly attributable to the
acquisition.

SUBSEQUENT MEASUREMENT

 In accordance with PFRS 9, paragraph 5.1.1, after the initial recognition,

accounts receivable shall be measured at amortized cost.

 Thus, the term net realizable value of accounts receivable is the amount of cash
expected to be collected or the estimated recoverable amount.

 Accordingly, in estimating the net realizable value of trade accounts receivable,

the following deductions are made:

1. Allowance for freight charge 3. Allowance for sales discount

2. Allowance for sales return 4. Allowance for doubtful accounts

TERMS RELATED TO FREIGHT CHARGE

 FOB DESTINATION , freight prepaid - freight shouldered and paid by the seller.
 FOB SHIPPING POINT , freight collect - freight shouldered and paid by the buyer.

METHODS OF RECORDING CREDIT SALES

1. Gross method - the accounts receivable and sales are recorded at gross amount
of the invoice. Common and widely used method.

2. Net method - the accounts receivable and sales are recorded at net amount of
invoice (invoice price less cash discount).

METHODS OF RECORDING BAD DEBT LOSS

1. Allowance Method - requires recognition of a bad debt loss if the accounts are
doubtful of collection.

2.Direct Write-off - requires recognition of a bad debt loss only when the accounts
proved to be worthless or uncollectible.
 CHAPTER 5

ESTIMATION OF DOUBTFUL ACCOUNTS

Methods of Estimating doubtful accounts

1. Aging the accounts receivable or “ statement of financial position approach”

2. Percent of accounts receivable or also statement of financial position approach.

3. Percent of sales or “ income statement approach”

AGING OF ACCOUNTS RECEIVABLE

 The aging of accounts receivable involves an analysis where the accounts are
classified into not due or past due.

 Required Allowance = ( balance of each accounts x percent of loss

experienced )

 Required AFDA end = Total of Required Allowance

Advantage : Presenting fairly the accounts receivable in the statement of financial

position at net realizable value.

Disadvantage: Prohibitively time consuming if a large number of accounts are

involved.

Objection: It violates the matching process.

PERCENT OF ACCOUNTS RECEIVABLE

 A certain rate is multiplied by the open accounts at the end of the period in
order to get the required allowance balance.

Formula : Rate x Balance of A/R = Req. AFDA, end

Advantage : Presenting the accounts receivable at estimated net realizable value.

Disadvantage: The loss experience rate may be difficult to obtain and may not be
reliable.

Objection: Violates the principle of matching bad debt loss against the sales
revenue.
PERCENT OF SALES

 The amount of sales for the year is multiplied by a certain rate to get the
doubtful accounts expense. The rate may applied to credit sales or total sales.

Formula: Credit Sales x Rate = Doubtful accounts expense

Advantage: Proper matching of cost against revenue is achieved.

Disadvantage: Accounts receivable may not be shown at estimated realizable value

because the allowance for doubtful accounts may prove excessive or inadequate.

Objection :This method is a contradistinction with the aging method and percent of
accounts receivable method since the resulting amount of the computation is
already the amount of the doubtful accounts expense and not the required
allowance.
 CHAPTER 6
NOTES RECEIVABLE

 Notes receivable are claims supported by formal promises to pay usually in the
form of notes.

 A promissory notes 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 on demand or at a definite future date.

 The term notes receivable represents only claims arising from the sale of
merchandise or services in the ordinary course of business.

 Thus, the notes received from officers , employees, shareholders, and affiliates
shall be designated separately.

DISHONORED NOTES

 When a promissory note matures and is not paid, it is said to be dishonored.

 Theoretically, dishonored notes should be removed from the notes receivable

and transferred to accounts receivable.

 The amount debited to accounts receivable should include the face amount,
interest, and other charges.

INITIAL MEASUREMENT OF NOTES RECEIVABLE

 Conceptually , notes receivable shall be measured initially at present value.

 The present value is the sum of all future cash flows discounted using the
prevailing market rate of interest for similar notes.

 However, short term notes receivable shall be measured at face value.

SUBSEQUENT MEASUREMENT

 Subsequent to initial recognition , long term notes receivable shall be measured

at amortized cost ( PFRS 9, paragraph 5.2.1) using effective interest method.

 The amortized cost is the amount at which the note receivable is measured
initially:

1. Minus principal repayment

2. Plus or minus cumulative amortization of any difference between the initial

carrying amount and the principal maturity amount.
3. Minus reduction for impairment or uncollectibility.

INTEREST - BEARING NOTES RECEIVABLE

 Interest - bearing long term notes are measured at face value which is actually
the present value upon issuance.

NON INTEREST - BEARING NOTES RECEIVABLE

 Non-interest-bearing long term notes are measured at present value which is

the discounted value of the future cash flows using effective interest rate.

 The term “non-interest bearing “ connotes to “interest being included in the

face amount ” rather than being stated as a separate rate.

 For long-term noninterest bearing notes receivable, the amortized cost is the
present value plus amortization of the discount , or the face value minus the
unamortized unearned interest revenue.
 CHAPTER 7
LOAN 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 days.

INITIAL MEASUREMENT OF LOAN RECEIVABLE

 At initial recognition , an entity shall measure a loan receivable at fair value plus
transaction costs that are directly attributable to the acquisition of financial
asset.

 The fair value of the loan receivable at initial recognition is normally the amount
of the loan granted.

 Transactions cost include direct origination cost

SUBSEQUENT MEASUREMENT

 PFRS 9, paragraph 4.1.2, provides that if a business model managing financial

asset is to collect contractual cash flows on specified dates and the contractual
cash flows are solely payments of principal and interest , the financial asset
should be measured at amortized cost.

 Accordingly, a loan receivable is measured at amortized cost using the effective

interest method.

ORIGINATION FEES

 The fees charged by the bank against a borrower for the creation of the loan
are known as “ origination fees”.

 Origination fees include compensation for the ff:

a . Evaluating the borrower’s financial condition

b . Evaluating guarantees, collateral and security
c . Negotiating the terms of the loan
d . Preparing and processing the documents related to the loan
e . Closing and approving the loan transaction
ACCOUNTING FOR ORIGINATION FEES

 The origination fees received from the borrower are recognized as unearned
interest income and amortized over the term of the loan.

 If the origination fees are not chargeable against the borrower, the fees are
known as “direct origination costs”

 Preferably, the direct origination costs are offset directly against any unearned
origination fees received.

 If the origination fees received exceed the direct origination costs, the difference
is unearned interest income and the amortization will increase interest income.

 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.

IMPAIRMENT LOAN

 A loan is impaired when it is not likely the lender will collect the full value of the
loan because the creditworthiness of a borrower has fallen.

 PFRS 9, paragraph 5.5.1 , provides that an entity shall recognize loss allowance
expected for credit losses on financial asset at amortized cost.

 Paragraph 5.5.3 provides that an entity shall measure the allowance for a
financial instrument at an amount equal to the lifetime expected credit losses if
the credit 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.

MEASUREMENT OF IMPAIRMENT

a . The probability-weighted outcome

b . The time value of money
c . Reasonable and supportable information that is available without undue
cost or effort

MEANING OF CREDIT RISK

 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.
 The risk contemplated is the risk that the issuer will fail to perform a particular
obligation.

 The risk does not necessarily relate to the credit worthiness of the issuer.
THREE - STAGE IMPAIRMENT APPROACH

Stage 1 - This stage covers debt instruments that have not declined significantly in
credit quality since initial recognition or that have low credit risk.

Stage 2 - This stage covers debt instruments that have declined significantly in credit
quality since initial recognition but do not have objective evidence of impairment.

Stage 3 - This stage covers debt instruments that have objective evidence of
impairment at the reporting date.

 A 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 lifetime of the instrument.

INTEREST INCOME

a . Under stages 1 and 2 , interest income is computed based on the gross

carrying amount or face amount.
b . Under stage 3, interest income is computed based on the net carrying
amount which is equal to the face amount minus allowance for loan impairment.
 CHAPTER 8
RECEIVABLE FINANCING
Pledge, Assignment, and Factoring

CONCEPT OF RECEIVABLE FINANCING

 Receivable financing is the financial flexibility or capability of an entity to raise

money out of it’s receivables.

FORMS OF RECEIVABLE FINANCING

a . Pledge of accounts receivable

b . Assignment of accounts receivable
c . Factoring of accounts receivable
d . Discounting of accounts receivable

Pledge of accounts receivable

 When loans are obtained from the bank or any lending institution, the accounts
receivable may be pledged as collateral security for the repayment of the loan.

 Th loan is recorded by debiting cash and discount on note payable if loan is

discounted , crediting note payable.

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

Assignment of accounts receivable

 It 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 more formal type of pledging of accounts receivable.

 Assignment may be done either non-notification or notification basis.

 When accounts are assigned on non-notification 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.

 When accounts are assigned on a notification basis, customers are notified to

make their payments directly to the assignee.
Factoring

 Factoring is a sale of accounts receivable on a without recourse notification

basis.

 In a factoring arrangement , an entity sells accounts receivable to a bank or

finance entity called the factor.

 Accordingly, 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 full responsibility for uncollectible factored accounts.

Factoring may take the form of the following:

a . Casual Factoring
b . Factoring as a continuing agreement

Casual Factoring

 If an entity finds itself in a critical cash position, it may be forced to factor some
or all 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 a continuing arrangement where a finance entity

purchases all of the accounts receivable of a certain entity.

 In this set up, before the merchandise is shipped to a customer , the selling
entity request the factor’s credit approval.

 If it is approved , the account is sold immediately to the factor after shipment of

the goods.

 Moreover, the factor may withhold a predetermined amount as a protection

against customer returns and allowances and other special adjustments.

 This amount withheld is known as “ factor’s holdback”

 Final settlement of the factor’s holdback is made after the factored receivables
have been fully collected.
 CHAPTER 9
RECEIVABLE FINANCING
Discounting of note receivable

CONCEPT OF DISCOUNTING

 Discounted on Note Receivable happens when the holder (payee) needs cash
before the maturity date and decides to sell them or endorse it to other financial
institutes (endorsee) at a lower price.

 Maker - is the one liable of payment on the date of maturity.

 Payee - is the one entitled to payment on the date of maturity.

ENDORSEMENT

 It is the transfer of right to a negotiable instrument by simply signing at the back

of the instrument.

 Endorsement with recourse means the endorser shall pay the endorsee if the
maker dishonors the note.

 If the note is discounting is with recourse , the transaction is accounted for as

either conditional sale or secured borrowing.

Journal entry ( conditional sale)

Recording of transaction

Cash xx
Loss on Note Receivable discounting xx
Note receivable xx
Interest Income xx

Note is paid by the maker on maturity

Note Receivable discounted xx

Note Receivable xx

Note is dishonored by the maker

1. Recording of payment to the bank:

Accounts receivable xx
Cash xx
2. To cancel the contingent liability:

Note Receivable discounted xx

Note Receivable xx

Journal entry (Secured Borrowing)

Recording of transaction

Cash xx
Interest expense xx
Liability for note receivable discounted xx
Interest Income xx

Note is paid by the maker on maturity

Liability for note receivable discounted xx

Note receivable xx

Note is dishonored by the maker

Accounts receivable xx
Cash xx

Liability for note receivable discounted xx

Note receivable xx

 Endorsement without recourse means endorser avoid future liability even if the
maker refuse to pay the endorsee on the date of maturity.

Journal Entry

Cash xx
Loss on Note Receivable discounting xx
Note receivable xx
Interest Income xx

TERMS RELATED TO DISCOUNTING OF NOTE

1. Net proceeds refer to the discounted value (Maturity value - Discount)

2. Maturity Value refer to the amount due on the note (Principal + Interest)

3. Maturity date is the date on which note should be paid.

4. Principal is the amount appearing on the face of the note .

5. Interest is the amount of interest for the full term ( Principal x rate x time)

6. Interest Rate is the the rate appearing on the face of the note.

7. Time is the period within the interest shall accrue.

8. Discount is the amount of inetrest deducted by the bank in advance.

(Discount --= Maturity value x discount rate x discount period)

9. Discount rate is the rate used by the bank in computing discount.

10. Discount period is the unexpired term of the note.