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RECEIVABLES

I. Concept of receivables
a. Are financial assets as defined in PAS 32
b. Have fixed or determinable payments that are not quoted in an active market (PAS 39)

II. Balance Sheet Classification


a. Current
i. Trade receivables collectible within 1 yr or normal operating cycle, whichever is longer
ii. Non-trade receivables collectible within 1 yr
b. Non-current

Note: customers with credit balances  current liabilities and not offset against debit balances in other
customers’ accounts, unless immaterial

Examples of non-trade receivables


 Advances to or receivables from employees and DOSRI (directors, officers, stockholders, related
interests)
 Advances to affiliates  usually considered long-term investments
 Subscriptions receivable  current if collectible within one year; otherwise, deduction from
subscribed capital stock
 Creditors’ accounts with debit balances  current; if not material, may be offset
 Claims receivable (insurance companies, BIR)  usually current

III. Balance Sheet Presentation


a. Current – usually as one item, net of ADA; breakdown is shown in the notes
b. Non-current – either as long-term investments or other noncurrent assets

IV. Measurement
a. Initial  at fair value plus transaction costs that are directly attributable to the acquisition
i. For short-term receivables  at original invoice amount (net of trade discounts, if any); not
discounted because of short duration
ii. For interest-bearing long-term receivables  at face value
iii. For non-interest bearing long-term receivables  present value of cash flows (discounted at
prevailing market price for similar receivables); contra-asset account is Unearned interest
income
b. Subsequent measurement
i. For non-interest bearing long-term receivables  amortized cost using effective interest
method
ii. Long-term receivables are written down (directly or through an allowance account, Allowance
for loan impairment) if impaired, i.e., carrying amount of receivable is less than the present
value of cash flows discounted at the original effective rate of interest. Upon subsequent
collection, the allowance is reduced and interest income is recognized.
iii. For accounts receivable  at net realizable value; i.e., gross amount less the following
allowances: allowance for freight charge, allowance for sales return, allowance for sales
discount, and allowance for doubtful accounts

V. Sales Returns and Allowances


a. For proper matching, an allowance for sales returns is set up at the end of the period for sales of the
year.
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b. Journal entry

Sales Return xx
Allowance for sales return xx

This entry is usually reversed at the beginning of the next period.

VI. Sales Discounts


a. Nature – cash discount offered to credit customers to encourage prompt payment; known as purchase
discount on the part of the buyer
b. Accounting methods
i. Gross method
ii. Net method (payments beyond the discount period result in an account Sales discount forfeited
that is classified as miscellaneous income
c. For proper matching, an estimate of sales discounts on receivables outstanding at the end of the
accounting period is made and the following entry is made:

Sales discount xx
Allowance for sales discount xx

This entry is usually reversed at the beginning of the next period.

VII. Freight Arrangements


a. Terms
i. FOB shipping point vs. destination
ii. Freight collect (paid by buyer) vs. prepaid (paid by seller)
b. Accounting for freight

VIII. Accounting for Bad Debts


a. Methods
i. Allowance
ii. Direct writeoff – non-GAAP; used by very small companies; BIR-compliant
b. Bad Debt Estimation
i. Aging the accounts receivable (a.k.a. balance sheet approach)
ii. Percent of accounts receivable (a.k.a. balance sheet approach)
iii. Percent of sales (a.k.a. income statement approach)

For the B/S approaches, amount computed represents the required allowance. This method results in
proper valuation of receivables in the balance sheet.

For the I/S approach, amount computed represents the bad debts expense. This method results in
proper matching of revenues and expenses in the income statement. Aging is done to test the
reasonableness of the allowance. Any discrepancy is considered a change in accounting estimate.

c. Presentation of Doubtful Accounts Expense in the income statement


i. As selling expense – if credit and collection activity is under the sales manager
ii. As administrative expense – if credit and collection activity is under another manager or if
problem is silent

IX. Receivables Analysis


a. Income/receivables recognition policy
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b. Adequacy of allowance
c. Receivables turnover

RECEIVABLE FINANCING

I. Pledge
a. An agreement whereby accounts receivable are used as collateral for loans.
b. Generally, the lender has limited rights to inspect the borrower’s records to achieve assurance that
the receivables do exist.
c. Generally, on non-notification basis; i.e., customers continue to pay to original obligee.
d. The debt is paid by the borrower, whether or not pledged receivables are collected.
Accounting Issues
a. Amount of receivables pledged should be disclosed, either by parenthetical note in the face of the
F/S or in the notes.
b. Pledged accounts receivable continue to be shown as current assets of the borrowing entity.
c. The related debt should also be identified as having been secured by a pledge of receivables.

II. Assignment of Receivables


a. Involves the transfer of the rights to the receivable to a lender (assignee) in consideration for a loan
b. Requires identification and separation in the books of the specific receivables that are subject of the
assignment (i.e., DR A/R assigned and CR A/R)
c. Requires disclosure in the notes of the assignor’s equity interest in assigned A/R (equity interest =
A/R assigned – notes payable)
d. Of two kinds: without notification – assignor continues to collect; with notification – bank collects
and uses proceeds to reduce the loan principal

III. Sale of Receivables Without Recourse (Factoring)


a. Requirements for sale:
i. Transferor and its creditors cannot access transferred receivables.
ii. Transferee has the right to pledge or exchange the transferred receivables.
iii. Transferor does not maintain effective control over the assets through either (a) an
agreement to repurchase them before their maturity or (b) the ability to cause the
transferee to return specific assets.
b. Customers are notified to make payments to the factor.
c. Results in a gain or loss (proceeds less book value of receivables sold)
d. Of 2 kinds: casual factoring – simple purchase/sale transaction and continuing agreement – factor
assumes credit and collection function. If factoring as a continuing agreement, the factor may
withhold a predetermined amount as protection against customer returns and allowances and other
special adjustments (called “factor’s holdback”). The factor’s holdback is a receivable from the

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factor and is considered a current asset. Final settlement of the factor’s holdback is made after the
factored a/r have been fully collected.

IV. Sale of Receivables With Recourse


a. Seller is required to recognize a liability based on an estimate of the receivables the seller may be
liable to pay to the buyer as these were uncollected from the customers. This liability “recourse
obligation” is an additional loss on the sale of the receivables.
b. The liability is liquidated upon the collection/settlement of all sold receivables. The actual obligation
of the seller may be more or less than the original estimate, and thus result in an additional loss or
miscellaneous income.

Source:
Notes from Prof. Florendo