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1
Pampanga
CPA
Review
May
2015
CPA
Review
Producing World Class CPAs
TOA
LECTURE
NOTE
MARCO
FERNANDO
NG
a.
Type
A
and
B
adjustments
can
be
either
added
or
subtracted
depending
upon
the
type
of
format
and
the
nature
of
the
item.
b.
Reconciling
items
must
be
analyzed
to
determine
whether
they
are
included
in
(1)
the
balance
per
bank,
and/or
(2)
the
balance
per
books.
Receivables
Accounts
receivable
should
be
disclosed
in
the
balance
sheet
at
net
realizable
value
(gross
amount
less
estimated
uncollectibles)
by
source
(e.g.,
trade,
officer,
etc.).
Officer,
employee,
and
affiliate
company
receivables
should
be
separately
disclosed.
Unearned
interest
and
finance
charges
should
be
deducted
from
gross
receivables.
Allowance method
a.
Under
the
direct
write-off
method
,
bad
debts
are
considered
expenses
in
the
period
in
which
they
are
written
off.
(1)
The
direct
write-off
method
is
the
method
required
for
tax
purposes.
2
Pampanga
CPA
Review
May
2015
CPA
Review
Producing World Class CPAs
TOA
LECTURE
NOTE
MARCO
FERNANDO
NG
AR (uncollectible AR)
b.
The
allowance
method
seeks
to
estimate
the
amount
of
uncollectible
receivables,
and
establishes
a
contra
valuation
account
(allowance
for
bad
debts)
for
the
amount
estimated
to
be
uncollectible.
(1)
The
adjusting
entry
to
set
up
the
allowance
is
AR (uncollectible AR)
(a) There are two methods to determine the annual charge to bad debts expense.
1] Annual sales
a]
Charging
bad
debts
expense
for
1%
of
annual
sales
is
based
on
the
theory
that
bad
debts
area
function
of
sales;
this
method
emphasizes
the
income
statement.
b]
When
bad
debts
expense
is
estimated
as
a
function
of
sales,
any
balance
in
the
allowance
account
is
ignored
in
making
the
adjusting
entry.
Bad
debts
expense
under
this
method
is
simply
the
total
amount
computed
(i.e.,
Sales
*
Percentage).
2] Year-end AR
a]
Charging
bad
debts
on
year-end
AR
is
based
on
the
theory
that
bad
debts
are
a
function
of
AR
collections
during
the
period;
this
method
emphasizes
the
balance
sheet.
b]
A
bad
debts
percentage
can
be
applied
to
total
AR
or
subsets
of
AR.
Often
an
aging
schedule
is
prepared
for
this
purpose.
An
AR
aging
schedule
classifies
AR
by
their
age
(e.g.,
30,
60,
90,
120,
etc.,
days
overdue).
c]
When
bad
debts
expense
is
estimated
using
outstanding
receivables,
the
expense
is
the
amount
needed
to
adjust
the
allowance
account
to
the
amount
computed
(i.e.,
AR
*Percentage[s]).
Thus,
bad
debts
expense
under
this
method
is
the
amount
computed
less
any
credit
balance
currently
in
the
allowance
account
(or
plus
any
debit
balance).
(3)
Net
accounts
receivable
is
the
balance
in
accounts
receivable
less
the
allowance
for
bad
debts.
(4)
The
policy
for
charging
off
uncollectible
trade
accounts
receivable
must
be
disclosed
for
receivables
that
have
a
contractual
maturity
of
one
year
or
less
and
arise
from
the
sale
of
goods
or
services.
3
Pampanga
CPA
Review
May
2015
CPA
Review
Producing World Class CPAs
TOA
LECTURE
NOTE
MARCO
FERNANDO
NG
3.
Transfers
and
servicing
of
financial
assets.
Transfers
of
financial
assets
include
the
transfer
of
an
entire
financial
asset,
a
group
of
financial
assets,
or
a
participating
interest
in
an
entire
financial
asset.
Specifically,
this
topic
includes
servicing
arrangements,
recourse
arrangements,
guarantees,
agreements
to
purchase
or
redeem
transferred
financial
assets,
options
written
or
held,
derivative
financial
instruments
that
are
entered
into
with
contemplation
of
a
transfer,
arrangements
to
provide
financial
support,
pledges
of
collateral,
and
transferors
beneficial
interests
in
the
transferred
financial
asset.
4
Pampanga
CPA
Review
May
2015
CPA
Review
Producing World Class CPAs
TOA
LECTURE
NOTE
MARCO
FERNANDO
NG
(a)
Recognizes
only
the
assets
it
controls
and
liabilities
it
incurs
after
the
transaction
has
occurred,
and
(b)
Derecognizes
assets
for
which
control
has
been
given
up
or
lost,
and
liabilities
for
which
extinguishment
has
occurred.
(3)
The
proceeds
received
from
the
sale
of
financial
assets
is
the
cash
or
other
assets
obtained,
including
separately
recognized
servicing
assets,
less
any
liabilities
incurred.
(a)
Any
asset
obtained
that
is
not
an
interest
in
the
transferred
asset
is
a
part
of
the
proceeds
of
the
sale.
(b)
Any
liability
incurred,
even
if
it
is
related
to
the
transferred
assets,
is
treated
as
a
reduction
of
the
proceeds
from
the
sale.
c.
Accounting
for
transfers
of
participating
interests.
In
order
to
be
eligible
for
sale
accounting,
the
entire
financial
asset
cannot
be
divided
into
components
before
the
transfer,
unless
all
the
components
meet
the
definition
of
a
participating
interest.
(1)
A
participating
interest
must
have
the
following
four
characteristics:
(1)
the
interest
is
a
proportionate
ownership
interest
in
an
entire
financial
asset;
(2)
all
cash
flows
received
from
the
asset
are
divided
proportionately
among
the
participating
interest
holders
based
upon
their
share
of
ownership;
(3)
the
rights
of
each
participating
interest
holder
have
the
same
priority
(i.e.,
in
transfers,
bankruptcy,
or
receivership);
and
(4)
no
party
has
the
right
to
pledge
or
exchange
the
financial
asset
unless
all
participating
interest
holders
agree.
(2)
When
a
transfer
of
a
participating
interest(s)
qualifies
as
a
sale,
the
transferor
should
(a)
Allocate
the
carrying
amount
of
the
entire
financial
asset(s)
between
the
participating
interest(s)sold
and
the
participating
interest
that
continues
to
be
held
by
the
transferor.
Relative
fair
values
at
the
date
of
transfer
are
used
to
allocate
the
carrying
amount.
(b)
Derecognize
the
participating
interest(s)
sold.
(c)
Recognize
and
measure
at
fair
value
servicing
assets,
servicing
liabilities,
and
any
other
assets
obtained
or
liabilities
incurred
in
the
sale.
(d)
Recognize
any
gain
or
loss
on
the
sale
in
earnings.
(e)
Report
any
participating
interest
that
continues
to
be
held
as
the
difference
between
the
previous
carrying
amount
and
the
amount
derecognized.
(3)
If
the
transfer
of
a
financial
asset
does
not
meet
the
criteria
for
a
sale,
the
transferor
and
transferee
account
for
the
transfer
as
a
secured
borrowing
with
the
financial
asset(s)
pledged
as
collateral.
d.
Factoring
of
receivables.
This
category
of
financing
is
the
most
significant
in
terms
of
accounting
implications.
Factoring
traditionally
involves
the
outright
sale
of
receivables
to
a
financing
institution
known
as
a
factor.
These
arrangements
usually
involve
(1)
notification
to
the
customer
to
forward
future
payments
to
the
factor
and
(2)
transfer
of
receivables
without
recourse,
which
means
that
the
factor
assumes
the
risk
of
loss
from
noncollection.
Thus,
once
a
factoring
arrangement
is
completed,
the
entity
has
no
further
involvement
with
the
receivables,
unless
the
customer
decides
to
return
the
merchandise.
In
its
simplistic
form,
the
receivables
are
sold
and
the
difference
between
the
cash
received
and
the
carrying
value
of
the
receivables
is
recognized
as
a
gain
or
loss.
(1)
Factoring
without
recourse
provides
two
financial
benefits
to
the
business:
it
permits
the
entity
to
obtain
cash
earlier,
and
the
risk
of
bad
debts
is
transferred
to
the
factor.
(a)
The
factor
is
compensated
for
each
of
the
aspects
of
the
transaction.
(b)
Interest
is
charged
based
on
the
anticipated
length
of
time
between
the
date
the
factoring
is
consummated
and
the
expected
collection
date
of
the
receivables
sold,
and
a
fee
is
charged
based
upon
the
anticipated
bad
debt
losses.
5
Pampanga
CPA
Review
May
2015
CPA
Review
Producing World Class CPAs
TOA
LECTURE
NOTE
MARCO
FERNANDO
NG
(c)
Merchandise
returns
will
normally
be
the
responsibility
of
the
transferor,
who
must
then
make
the
appropriate
settlement
with
the
factor.
1]
To
protect
against
the
possibility
of
merchandise
returns
which
diminish
the
total
amount
of
the
receivables
to
be
collected,
a
factor
will
often
holdback
a
portion
of
the
amount
of
the
receivables
factored
in
addition
to
taking
the
interest
and
fee.
2]
The
transferor
will
charge
any
merchandise
returns
to
a
factors
holdback
receivable
account
that
is
created
when
the
receivables
are
factored.
At
the
end
of
the
return
privilege
period,
any
remaining
holdback
will
become
due
and
payable
to
the
borrower.
(d)
Factoring
transfers
title
to
the
receivables.
Thus,
if
there
is
a
without
recourse
provision,
the
removal
of
these
receivables
from
the
borrowers
balance
sheet
is
clearly
warranted.
(2)
Factoring
arrangements
may
also
involve
factoring
with
recourse.
(a)
In
a
with-recourse
arrangement,
if
the
customer
does
not
pay
the
factor,
the
transferor
must
pay
the
factor
the
amount
due
on
the
account.
(b)
The
rules
for
transfer
of
receivables
with
recourse
vary
by
jurisdiction;
therefore,
transfers
with
recourse
may
or
may
not
qualify
for
sale
treatment.
(c)
If
the
factoring
with
recourse
arrangement
qualifies
as
a
sale,
the
recourse
liability
is
treated
as
reduction
of
the
proceeds
received
in
the
transfer.
1]
In
computing
the
gain
or
loss
to
be
recognized
at
the
date
of
the
transfer
of
the
receivables,
the
borrower
(transferor)
must
take
into
account
the
anticipated
chargebacks
from
the
transferee
for
bad
debts
expected
to
be
incurred.
This
action
requires
an
estimate
by
the
transferor,
based
on
past
experience.
2]
Adjustments
should
also
be
made
at
the
time
of
sale
for
the
estimated
effects
of
any
accelerated
payments
by
customers
(where
the
receivables
are
interest-bearing
or
where
cash
discounts
are
available).
e.
Servicing
of
financial
assets.
(1)
Servicing
of
financial
assets
may
involve
any
one
or
all
of
the
following
activities:
(a)
Collecting
payments
(b)
Paying
taxes
and
insurance
(c)
Monitoring
delinquencies
(d)
Foreclosing
(e)
Investing
(f)
Remitting
fees
(g)
Accounting
(2)
Although
inherent
in
transfers
of
most
financial
assets,
servicing
is
a
distinct
asset
or
liability
only
when
separated
contractually
from
the
underlying
financial
asset.
The
servicing
asset
usually
results
either
from
separate
purchase
or
assumption
of
the
servicing
rights,
or
from
securitization
with
retained
servicing.
The
servicers
obligations
are
specified
in
the
contract.
(3)
Typically,
the
servicing
contract
results
in
an
asset
because
the
benefits
are
more
than
adequate
compensation
for
the
cost
of
servicing.
The
benefits
include
fees,
late
charges,
float,
and
other
income.
(4)
If
the
benefits
do
not
provide
fair
compensation,
the
servicing
contract
is
a
liability.
The
fair
value
of
a
servicing
contract
is
based
on
its
value
in
the
market
and
is
not
based
on
the
internal
cost
structure
of
the
servicer.
Thus,
the
concept
of
adequate
compensation
is
judged
by
requirements
that
would
be
imposed
by
a
new
or
outside
servicer.
In
cases
where
there
is
not
a
reliable
market
for
the
contract,
present
value
methods
may
be
used
to
value
the
servicing
contract.
(5)
In
summary,
the
servicer
should
record
the
servicing
contract
based
on
the
following
criteria:
(a)
More
than
adequateresulting
in
a
recorded
asset
(b)
Adequate
compensationresulting
in
no
asset
or
liability
6
Pampanga
CPA
Review
May
2015
CPA
Review
Producing World Class CPAs
TOA
LECTURE
NOTE
MARCO
FERNANDO
NG
7
Pampanga
CPA
Review
May
2015
CPA
Review
Producing World Class CPAs
TOA
LECTURE
NOTE
MARCO
FERNANDO
NG
8
Pampanga
CPA
Review
May
2015
CPA
Review
Producing World Class CPAs
TOA
LECTURE
NOTE
MARCO
FERNANDO
NG
4.
Disclosures.
Additional
disclosures
required
for
receivables,
off-balance-sheet
credit
exposure,
and
foreclosed
and
repossessed
assets
include
the
following:
-End -
9 Pampanga CPA Review May 2015 CPA Review Producing World Class CPAs