FINANCIAL ACCOUNTING AND REPORTING

RECEIVABLES

A receivable is the right to receive cash, another asset (goods) or services. It is a non-derivative financial asset with
fixed maturity (including investment in debt securities and deposit held by banks) quoted in an active market as financial
asset at FV.

Receivables may be current or noncurrent and trade or nontrade

 The rules on current and noncurrent classification are discussed in detail under PAS 1 and are also based on
the receivable as either trade or nontrade

 Trade receivables arise from the sale of goods or services to customers and in the form of accounts
receivable or notes receivable while nontrade receivables are receivables from all other types of transactions
like advances to officers and (IOU) employees, advances to supplier, advances to affiliates/subsidiary,
subscription receivable, creditors’ debit balances, special deposits on contract bids, accrued income and claims
receivables.
** Advances to affiliates/subsidiary are classified as current asset if collectible within 1 year but usually treated
as long-term investments.
** Subscriptions receivable are current asset if collectible within 1 year, otherwise a deduction from subscribed
share capital.
** Creditors’ debit balances, result of overpayment or returns and allowances.
** Special deposits on contract bids are generally classified as non-current assets because deposits are more
likely to remain outstanding for a long period of time.

Accounts receivable arise from credit sales. The amount to be recorded as accounts receivable from sales on account
shall be the “Invoice Price or exchange price” which is the amount after deducting trade discounts from the List
Selling Price. Take note that trade discounts are not accounted for and are ignored for recording purposes .

Example: An item is sold to a credit customer under terms of 2/15 and net 30, FOB shipping point terms with a list
selling price of P2, 000, 000 with trade discounts of 20% and 10%. The Invoice price is computed as follows:

Li st sell i ng p ri c e 2,000,00 0
Less: 20% trade discount 400,00 0
Net 1,600,00 0
Less: 10% trade discount 160,00 0
Invoice pric e 1,440,00 0

As mentioned the entry will not include the total trade discount of P560, 000 (400,000 + 160,000) but instead only the P1,
440, 000 amount will be recorded as follows:

Accounts Receivable 1,440,000

Sales 1,440,000

The following transactions also affect accounts receivable in computing for the ending balance:

A C C O U N T S R E C E I V A B L
E
Beg. Balance
+ Credit Sales (-) Sales returns and allowances
+ Recovery of accounts written of f ( - ) S a l e s d i s c o u n t s
(-) Collections including recovery
(-) Write of f
(-) Factored accounts

▫ The write off for accounts receivable under the allowance method is recorded by:

Allowance for doubtful accounts xx

Accounts Receivable xx

So therefore the recovery or the collection on an accounts receivable that already has been written off cannot be
recorded by simply debiting cash and crediting accounts receivable. The entry for the write off must be reversed and
before recording the collection with the following two entries:
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 FINANCIAL ACCOUNTING AND REPORTING

Accounts Receivable xx
Allowance for doubtful accounts xx

Cash xx
Accounts Receivable xx

▫ Combining the two entries will be more efficient by:

Cash xx
Allowance for doubtful accounts xx

The ending balance of accounts receivable shall be presented as part of current assets under the heading of “trade and
other receivables” at the Net Realizable Value (expected cash value) or “amortized cost ”.

This is based on the established basic principle that "Assets shall not be carried at above their recoverable amount."

The net realizable shall be computed after deducting an allowance for the following:

 Sales returns – Value of merchandise expected to be returned by customers as a result in error of deliveries
and defects
Sale return xx
Allowance for Sale return xx

 Sales discounts–Value of price savings to customers expected to pay within the discount period and take
advantage of the cash discount.

▫ To record the allowance for sales discount at the end of the reporting period:
Sales discount xx
Allowance for Sales discount xx
*This adjustment may be reversed at the beginning of the next period in order that discount be charged
normally to sales discount account.

 2 Methods of recording Credit Sales:

1. Gross Method - AR and Sales are recorded at gross amount of the invoice.
- Common and widely used.
2. Net Method – AR and Sales are recorded at net amount of the invoice (Invoice price – Sales discount)
- Initially recognized AR at amortized cost.

 If AR is collected beyond the discount period: Cash (DR) at gross amount of the invoice, AR (CR) at net amount
of discount and Sales discount forfeited (CR) classified as other income using net method of recording credit
sales.

 Freight charges – Amount of freight charges collected by the shipper from the buyer even though the shipment
was under FOB destination terms. This amount shall not be remitted by the buyer hence deducted from the
receivable.
Determine the
ownership of goods ▪ FOB DESTINATION - Ownership of the goods purchased is transferred only to the buyer upon receipt.
in transit and who Seller shall be responsible for the freight charge up to the point of destination.
supposed to pay the ▪ FOB SHIPPING POINT - Ownership is transferred to the buyer upon shipment and the buyer pay for
freight charge.
the transportation charges from point of shipment to destination.

• FREIGHT COLLECT - Freight charge is not yet paid and is actually paid by the buyer. Determine who
actually paid the
• FREIGHT PREPAID - Freight charge is already paid by the seller freight charge.

 Doubtful accounts – Allowance for expected uncollectability that is an inherent risk from selling on credit.

Allowance Method vs. Direct Write-off Method

A l l o w a n c e D i r e c t W r i t e -
o f f

A p p l i c a t i o n Generally Accepted (conforms with matching principle) Non-GAAP (recognized by BIR for inc tax purposes)
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Expense and Increase

Accounts considered doubtful Not accounted for
the Allowance
Debit bad debts expense and
W r i t e - o f f Debit Allowa nce and Cr edit A R
Credit AR
R e c o v e r D e b i t A R a n d
De bi t AR a nd cr ed it Al lo wa n c e
y credit expense
*If recovery is subsequent to the year of writeoff and Direct writeoff is used, recovery is CR to Other Income
The computation for the doubtful accounts expense which is an adjusting entry and the allowance for doubtful accounts
will be as follows:

Beginning balance X ADA

Write off (X) Write Of Beg. Bal
Recovery X Recovery
Balance before adjustment X Adjustment
Doubtful accounts expense X End. Bal
Ending balance X
*ADA normal balance is CR

Presentation of Doubtful Account Expense in the Income Statement:

a. Distribution Cost- if the granting of Credit and Collection of account is under the charge of the Sales Manager.
b. Administrative Cost- if the granting of Credit and Collection of account is under the charge of an Officer other
than Sales Manager.
*In the Absence to the contrary, Doubtful Account Expense shall be classified as Administrative Expense.

There are 3 methods in estimating doubtful accounts:

1) The percentage of net credit sales or income statement approach method which will provide the amount
of doubtful accounts expense for the year and therefore is a method that emphasizes proper matching of
doubtful accounts against sales. This amount will then be added to the balance before adjustment, the
total of the two will then be the amount of allowance at year end or after adjustment.
- Proper matching of cost against revenue.
- AR may not show at Estimated Net Realizable Value.
- The resulting amount of the computation represents the AMOUNT OF DOUBTFUL ACCOUNTS
EXPENSE TO BE RECORDED.
- Prove unsatisfactory when there’s a considerable fluctuation in the proportion of cash and credit
sales periodically.
- Bad debts loss is directly related to sales and reported in the year of sale.
**Rate (=bad debt losses in prior year÷charge sales of prior years) shall be applied on CREDIT SALES or CURRENT
YR’S TOTAL SALES

2) The percentage of accounts receivable or statement financial position approach method will provide
the amount of required allowance for doubtful accounts and just like its counterpart the “Aging Method”,
the amount of doubtful accounts expense will be worked back as an adjustment to the amount of required
allowance.
- Presents AR at Estimated Net Realizable Value.
- Violates the principle of principle of matching bad debts loss against the sales revenue.
- The resulting amount of the computation represents the REQUIRED ALLOWANCE THE END OF
THE PERIOD (ENDING BALANCE OF ADA).
**Rate used is usually determined from past experience of the entity. (ADA in the prior years÷AR in the prior years)

3) The Aging of accounts receivable or statement financial position approach method that is arguably the
most accurate of all three methods since an analysis is made and each classification of accounts receivable is
multiplied by a specific rate of the estimate of uncollectability. Naturally older accounts receivable are more
likely to be uncollectible compared to newer or more recent sales.
- AR are fairly presented in the FS at Net Realizable Value.
- Violates the matching process and time consuming.
- The resulting amount of the computation represents the REQUIRED ALLOWANCE AT THE END
OF THE PERIOD (ENDING BALANCE OF ADA).

**Past due means period beyond the maximum credit term.

IMPAIRMENT OF ACCOUNTS RECEIVABLE

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AR considered uncollectible are deemed to be impaired.

IMPAIRMENT ASSESSMENT
 3 Guidelines in assessing whether AR is impaired:
a. Individually significant AR should be considered for impairment separately and if impaired, the impairment loss
is recognized.
b. AR not individually significant should be collectively assessed for impairment.
c. AR not considered impaired should be included with other AR with similar credit-risk characteristics and
collectively assessed for impairment.

** The rationale for including the unimpaired AR in the collective assessment is that an entity doesn’t have all the
necessary info. to make an informed decision for individual assessment.
** Percentage of Sales and AR Method are considered COLLECTIVE ASSESSMENT APPROACH of measuring
impairment.
** Aging of AR Method is an INDIVIDUAL ASSESSMENT APPROACH.

▫ To record the impairment loss:

Doubtful account expense
ADA
Notes Receivables are claims supported by a promissory note.

 NR shall be measured initially at Present Value which is the sum of all future cash flows discounted using the
prevailing market rate of interest or effective interest rate for similar notes.
 However, Short term NR and long-term interest bearing receivables measured at Face Value (orig. invoice
amount or PV upon issuance). While long-term non-interest bearing notes shall be measured at present value
which is the discounted value of the future cash flow using the effective interest rate.
 Long-term NR shall be subsequently measured at Amortized Cost using the effective interest rate.
Amortized Cost is the amount which NR is measured initially:
a. – Principal Repayment.
b. + Or – Cumulative Amortization between the difference of Initial CA and the Principal Maturity
amount.
c. – Reduction for Impairment or Uncollectibility
For long-term non-interest bearing NR, Amortized Cost is the Present Value + Amortization of the
Discount or the Face Value – the Unamortized Unearned Interest Income.

NR are said to be dishonored when a promissory notes matures and not paid. They are theoretically removed from the
NR account and transferred to AR at an amount to include, if any, interest and other charges. And should be recorded as
follows:
Accounts Receivables Xx
Notes Receivables Xx
Interest Income Xx
**Interest bearing note recognized ACCRUED INTEREST INCOME
When Interest is COMPOUNDED, meaning any accrued interest receivable also earns interest.
**Non-interest bearing notes always recognize an UNEARNED INTEREST INCOME
UNEARNED INTEREST INCOME=Face Value of the note – PV of the note or cash sales price for the sales in the
ordinary course of business.
GAIN ON SALE= SP(DP+PV of the note)-Cost/CA of the asset sold
Interest Income can be computed by:
YEAR NR=400,00 FRACTIO INTEREST INCOME
0 N
2015 400,000 4/10 20,000
2016 300,000 3/10 15,000
2017 200,000 2/10 10,000
2018 100,000 1/10 5,000
1,000,000 50,000
OR if w/ Prevailing Interest Rate

Valuation or the Carrying Amount of Notes Receivable

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 Notes receivable shall be presented at its present value or the discounted value of its cash flows.

 As a rule, if the note is interest bearing and the interest rate is a realistic interest rate, the face value of the
note shall be its present value. An exception to this rule is that noninterest bearing notes shall not be
discounted if they are short term. Although there is still a difference between the face value and the present
value, the discount is deemed to be immaterial and therefore computing for the present value shall not be
necessary.

 Therefore, it shall be for both noninterest bearing and long term notes where it will be necessary to discount the
cash flows in order to present the notes at their present value. However, even if a note is interest bearing but if
the interest rate is unreasonably low, it will be necessary to compute for the present value of the cash flows
which will include the future interest computed on the low interest rate.

 If the note if a term note, the present value of 1 concept shall be applied, if the note is an installment note and
the installments and intervals are equal, the present value of an ordinary annuity shall be used.

 The 12 month collection period shall also be applied to determine if it’s a current asset or non-current asset.
However, the present value shall be the amount to be presented; hence the related discount shall be deducted
from the face value of the note representing the cash flow.

Loan Receivable- is a loan granted by a bank or other financial institution to a borrower or client. Term may be short-
term but in most cases repayment periods covers several years.
 Measured initially at fair value (orig. transaction price/ amount of loan granted) plus transaction costs
directly attributable to the acquisition which include direct origination costs and subsequently measured at
Amortized Cost using the effective interest rate.
 Indirect origination cost- outright expense.
 If the initial carrying amount recognized (Principal amount/amount of loan granted – Origination fees received
from borrower + Direct origination cost incurred) is < than the principal amount meaning there’s a DISCOUNT
and effective interest rate is > the nominal rate of 12%, amortization is added to the carrying amount.
Otherwise, deducted.
 Origination fees- are fees charged by the bank against the borrower for the creation of the loan. Origination fees
received from borrower are unearned interest income and amortized over the term of the loan using effective
interest method, while Origination fees not chargeable to borrower are known as direct Origination cost treated
as deferred.
 Origination fees received > direct origination cost, the difference is unearned interest income and the
amortization will increase interest income.
 Origination fees received < direct origination cost, the difference is charged to direct origination cost
and the amortization will decrease interest income.
**Preferably, direct acquisition costs are offset directly against any unearned origination fees received.
**Accordingly, Origination fees received and direct origination costs are included in the measurement of the loan.
▫ To record Origination fees received from the borrower:
Cash xxx
Unearned Interest Income xxx
▫ To record Direct Origination Cost incurred by the bank:
Unearned Interest Income xxx
Cash xxx

Under Effective Interest Method:

Interest Received = Principal * Nominal Rate

▫ To record:
Cash xxx
Interest Income xxx
Interest Income = CA * Effective Rate
▫ To record:
Unearned Interest Income xxx
Interest Income xxx

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**Effective interest rate is computed through trial and error or interpolation approach. It should equate the present value
of the future cash flows of the loan to the initial CA of the LR (PV of cash flow = Initial CA).

Loan Impairment Loss–Both PFRS 9 and US GAAP requires the assessment of the collectability of a loan receivable
and whenever circumstances and present information and events indicate that it will be probable that any portion of the
principal and interest agreed upon will not be collected an allowance for the present value of cash flows that will not be
collected shall be recognized. The computation corresponding entry shall be as follows:

PV of expected cash flows X

Less: Face value X
Accrued interest X X
L oa n im pa ir me n t l os s (X )

Loan impairment los s xx

AccruedInterest receivabl e Xx
Allowance for loan impairmen t Xx

The interest receivable shall be CR directly because collection is unlikely meanwhile the allowance shall be deducted
from the current balance or CA of the loan receivable.

RECEIVABLE FINANCING

Accelerating the collection of receivables either by using accounts receivable as a loan collateral, selling the receivables
without recourse and discounting of notes receivable. (Capability of an entity to raise money out of its receivables.)

**Financial distress occurs when collections of receivable are delayed but cash payments for obligations must
be maintained.

The use of receivables as a loan collateral can either be a designated as a pledging of accounts
receivable or an assignment of accounts receivables
P l e d g i n g A s s i g n m e n t

 Total or all of the accounts receivable is used. (General)
 A disclosure is made of the fact that receivables have been
Pledged, No entry with respect to the pledged accounts.
 The accounts receivable is accounted for normally but are
not reclassified.
 Accounting for the loan shall be made with respect to
the proceed, recording of interest and payment of the principal.
** If the loan is DISCOUNTED, it means that the interest is deducted in
advance. Meaning net proceeds is equal to Face value of loan – Interest
deducted in advance.
Features of Assignment of AR:
 A specific portion of accounts receivable are
used as Collateral. Not all of the accounts receivable
balance. (Specific)
 A reclassification is made on the assigned accounts.
Transfer of AR to AR Assigned.
 Disclosure on the “equity in assigned accounts
of the assignor” is disclosed in the notes.
 The equity in assigned accounts is the
difference between the balance of the assigned
accounts and the balance of the loan.
 Secured by a financing agreement and a
promissory note.

1. Account assigned on a non-notification basis, customers aren’t informed that their accounts have been
assigned. Hence, customers continue to make payments to the assignor/borrower, who in turns remits the
collection to the assignee/lender.
2. Account assigned on a notification basis, customers are notified to make their payments directly to the
assignee.
3. The assignee usually charges interest to the loan and required a service or financing charge/commission for the
assignment agreement.

 The absolute sale of receivable on a without recourse , notification basis is known as Factoring and can be either a
“casual factoring” transaction or “factoring as a continuing agreement”.
 Gain or loss = proceeds received – Net carrying amount of receivables factored

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 In factoring, an entity actually transfers ownership of the AR to the factor (bank). Thus, factor assumes the
responsibility for uncollectible factored accounts and collection. While assignment of AR, assignor retains ownership
of the accounts assigned.

Casual factoring is a sale of the receivables at a discount. This is similar to any type of sale of an asset in order to
generate cash quickly. However the sale is always made below the carrying amount or the net realizable value of the
accounts receivable and therefore a loss shall be recognized as follows:

Fa ce va lu e o f AR X
Less: Service fee or commission s X
Selling price / Proceeds X
Less: Net Carrying amount
Accounts receivable X
All ow a n c e s X X
Loss on factoring X

Factoring as a continuing agreement involves the sale of all accounts receivable to a financing entity on a long term
basis and where the buyer is committed to buy the receivables before the actual goods are sold to the customers on
credit. In other words, the collection and credit responsibilities are surrendered to the buyer as soon as goods are
delivered to the customers. The following items shall be deducted from the face value of the receivables:

Face value of AR X
Less: Service fee or commissions X
Interest charges / discount s X
Factor’s holdback X X
Proceeds from factoring X
**Factor’s Holdback- is a protection against customer returns and allowances and other special adjustment. It is actually
a RECEIVABLE from factor (CA). Final settlement of Factor’s Holdback is made after the factored receivables have been
collected.

Both the service fee and interest shall be recognized as an expense, meanwhile the factor’s holdback is a receivable
from factor after the factored receivables have been fully collected and a value where the factor shall deduct the sales
discounts and sales returns taken by the seller’s customers before finally remitting to the seller the balance when all of
the accounts receivable is collected.

Discounting of notes receivable that is with recourse and on a notification basis shall involve the following
computation:

Face value or principal X

Interest on maturity X
Maturity value X
Less: Discount (MV x DR x remaining term) X
Net Proceeds from discounting X
L e s s : C a r r y i n g A m o u n t o f N R
Principal x
Accrued Interest receivable x
( ( X )
L o s s o n N o t e D i s c o u n t i n g X
The discount rate shall be determined by the bank buying the note, however if there is no discount rate provided, the
same rate on the note shall be used as the discount rate. The remaining term is also known as the “discount period”.
The total receivable shall also be computed on the date of the discounting which is the face value plus the accrued
interest from the date of the note. This amount shall then be compared with the proceeds of the discounting and a “loss”
shall be recognized for the difference.
*Accrued Interest Receivable = Principal * Interest Rate * number of days/mos until discount date ÷ 12mos or 360 or 365

To discount the note, the payee must endorse it. Thus, the payee becomes the endorser and the bank becomes the
endorsee.
 Endorsement with recourse- the endorser shall pay the endorsee if the maker dishonors the NR. This is
known as contingent or secondary liability. The discounting transaction is accounted as either:
 Conditional Sale recognizing Contigent Liability.

▫ Upon discount date:

Cash(net proceeds) xx
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Loss on discounting xx
Notes receivable discounted (face value ) x x
I n t e r e s t i n c o m e xx
** Notes receivable discounted (face value) is deducted from the total NR in preparing the balance sheet with disclosure of the
contingent liability.

▫ If NR is paid by the maker on maturity:

NR Discounted xx
NR xx

▫ If Dishonored:
AR xx
Cash xx
(To record the payment to Bank)

NR Discounted xx
NR xx
(To cancel the Contigent Liabiliity)

The note receivable discounted account is credited rather than writing off the notes receivable account
because of the contingent liability feature of the discounting transaction. However, this account shall
be a contra-asset account and deducted from the total notes receivable to be presented in the
statement of financial position.

 Secured Borrowing- the NR is not derecognized but instead an accounting liability is recorded at an
amount equal to the face value of the NR discounted.
-No gain/loss on discounting.
Cash xx
Interest Expense xx
Liability for Notes receivable discounte d x x
I n t e r e s t i n c o m e xx

▫ If NR is paid by the maker on maturity:

Liability for NR Discounted xx

NR xx

▫ If Dishonored:
AR xx
Cash xx
(To record the payment to Bank)

Liability for NR Discounted xx

NR xx
(To cancel the Liabiliity)
** Discounting of NR with recourse is accounted for as conditional sale with recognition of a contingent liability.
REASON: Upon discounting or endorsement of NR, with or without recourse, the transferor or endorser has lost
control over the NR. The transferee has complete control over the NR since he has the ability to sell the asset to
a 3rd party without attaching any restrictions to the transfer.

 Endorsement without recourse- the sale of the NR is absolute, therefore there’s no contingent liability.
** In the absence of any evidence to the contrary, endorsement is assumed to be with recourse.

The entry for the discounting shall be as follows:

Cash xx
Loss on discounting xx
N o t e s r e c e i v a b l e x x
I n t e r e s t i n c o m e xx

The note receivable account is credited directly because the sale of NR is w/o recourse or absolute.

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** No discount rate given, interest rate is assumed as the discount rate.

 Discount- amount of interest deducted by the bank on advance.

 Maturity Value- amount due on the note at the date of maturity.
 Carrying amount of NR= Principal + Accrued Interest Receivable (Int. earned from issuance to discount date)
 Gain/Loss on Discounting= Net Proceeds – CA of NR

Principal/Face Value P xxx

Plus: Interest
Principal P xxx
Multiply: Interest Rate x%
Time Period (entire period of the loan) xx/12mos Xxx
Maturity Value P xxx
Less: Discount
Maturity Value P xxx
Multiply: Discount Rate x%
Discount Period (unexpired term) xx/12mos (xxx)
Net Proceeds P xxx

END

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