FAR-04-Receivables - Notes PDF

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RECEIVABLESKARIM G. ABITAGO, CPARECEIVABLESKARIM G. ABITAGO, CPAREO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Conveniencerealexcellenceonline.com REAL EXCELLENCE ONLINE CPA REVIEWReceivables in General Definition Receivables are financial asse ts because they represent a contractual right to...

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Page 1 of 10 | FAR Handouts No. 04 RECEIVABLES KARIM G. ABITAGO, CPA

RECEIVABLES KARIM G. ABITAGO, CPA Receivables in General Definition Receivables are financial assets because they represent a contractual right to receive cash or another financial asset from another entity. Measurement Initial Measurement Fair Value + Transaction Costs Subsequent Measurement Amortized Cost Classification (1) Trade Receivable – are receivables arising from the sale of goods and services in the ordinary course of business. Presentation on the FS: classified as current assets when they are expected to be realized in cash within the normal operating cycle or one year, whichever is longer. Examples: Trade accounts receivable, trade notes receivable and trade instalment receivable. (2) Non-trade Receivable – are receivables arising from other sources. Presentation on the FS: classified as current assets when they are expected to be realized in cash within one year, the length of the operating cycle notwithstanding. Presentation All trade and current non-trade receivables are presented in one line item in the current asset section of the Statement of Finacial Position as “Trade and Other Receivables”. Accounts Receivable Initial Measurement: Transaction Price / Invoice Price Notes: (a) To compute invoice price, it should be net of trade discount or volume discount and net of cash discounts if the company is using net method. Solution guide: List price xxx Less: 1st Trade Discount xxx Balance xxx Less: 2nd Trade Discount xxx Invoice Price xxx Illustration An entity sold goods to its customers at a list price of P10,000 on account under credit terms 10, 20, 2/10 n/30. The 10, 20 figures represent the trade discount. This means that the first trade discount is 10% and the second trade discount is 20%. The 2/10 n/30 means that there is an available 2% cash discount if the customer pay on or before the 10th day and the credit terms is 30 days. List price P10,000 Less: 1st Trade Discount (10% x 10,000) 1,000 Balance 9,000 Less: 2nd Trade Discount (20% x 9,000) 1,800 Invoice Price 7,200 Summary of Journal Entries Gross Method Net Method (1) Sale on account Accounts receivable 7,200 Accounts receivable 7,056 Sales 7,200 Sales 7,056 (2) Assume collected Cash 7,056 Cash 7,056 within discount Sales discount 144 Accounts receivable 7,056 period Accounts receivable 7,200 (3) Assume collected Cash 7,200 Cash 7,200 beyod discount Accounts receivable 7,200 Sales discount forfeited 144

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Page 2 of 10 | FAR Handouts No. 04 KARIM G. ABITAGO, CPA RECEIVABLES

(b)

period Accounts receivable 7,056 Credit balances or negative balances in accounts receivable resulting from overpayments or advances cannot be offset against receivables with positive balances. These should be presented as current liabilities. Subsequent Measurement: Net Realizable Value = Gross Balance – Allowances

(a)

To compute the ending gross balance of accounts receivable, please see the below template. Accounts Receivable Beg. Balance xx Credit Sales xx Sale Discount Forfeited

End. Balance

Collections Sales Discount Sales Return Notes As Payment Write-off

xx xx xx xx xx

xx

There are four types of allowances: (1) Allowance for sales returns (2) Allowance for sales discounts (3) Allowance for freight charge (4) Allowance for doubtful accounts Note: (1) Entry for allowance for sales returns Sales returns xx Allowance for sales returns xx (2) Entry for allowance for sales discounts Sales discounts xx Allowance for sales discounts xx (3) Allowance for freight charge - results when the shipping term is FOB Destination, Freight Collect Accounting for Freight Charges Party Who is chargeable? Who actually paid? Buyer FOB Shipping Point Freight Collect Seller FOB Destination Freight Prepaid Note: If freight charges resulted to an increase in accounts receivable due to the credit terms, always remember that it is not subject to cash discount. In other words, it will increase the amount of cash to be received by the seller but this amount can’t be subject to cash discount. (4) Allowance for doubtful accounts

Accounting for bad debts

Direct Write-off Method Allowance Method

Balance Sheet Method

Income Statement Method

Percent of AR Method (ADA) Aging Method (ADA) Percent of Credit Sales Method (DAE)

Mixed

Summary of journal entries in accounting bad debts Direct Write-off Allowance (1) Collectability becomes doubtful No Entry Bad Debts Exp. xx Allowance for BD (2) Write-off Bad Debts Exp. xx Allowance for BD xx AR xx AR (3) Recovery AR xx AR xx BDE/Gain xx Allowance for BD Cash xx Cash xx AR xx AR

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Page 3 of 10 | FAR Handouts No. 04 KARIM G. ABITAGO, CPA RECEIVABLES

To compute the ending gross balance of allowance for doubtful accounts, please see the below template. Allowance for Doubtful Accounts (ADA) Write-off xx Beg. Balance xx Doubtful Accounts Expense xx (DAE) Recovery xx End. Balance xx Notes Receivable Definition Notes receivable are claims supported by formal promises to pay usually in the form of notes. a promissory note 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. Measurement Classification Initial Measurement Subsequent Measurement Interest bearing Short-term Non-interest bearing* Face Value with reasonable rate Amortized Cost Interest bearing Long-term with unreasonable rate** Present Value Non-interest bearing *Assuming discounting is immaterial; otherwise it should be presented in present value. ** Notes with unreasonable rate bears an interest which is not equal to the market rate of interest. Loans 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 years. Measurement Initial Measurement Face Value Add: Direct Origination Costs Less: Origination Fee Initial Carrying Value (ICV)

xx xx (xx) xx Subsequent Measurement Amortized Cost

NOTE: (1)

(2)

If Scenario Interest Treatment on Amort. ICV > Face Value Premium Nominal Interest > Effective Interest Deduct from CA ICV < Face Value Discount Nominal Interest < Effective Interest Add to CA The fees charged by the bank against the borrower for the creation of the loan are known as "origination fees". Direct origination costs are directly attributable costs incurred by the lender to originate a loan

Impairment of Loans Impairment is the decrease in the carrying amount of a receivable due objective evidence of loss events. PFRS 9, paragraph 5.2.2, in conjunction with PAS 39, paragraph 58, provides that an entity shall assess at every end of reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. If such evidence exists, the entity shall determine and recognize the amount of any impairment loss. The carrying amount of the loan receivable shall be reduced either directly or through the use of an allowance account. The amount of the impairment loss shall be recognized in profit or loss. How to compute impairment loss?

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Page 4 of 10 | FAR Handouts No. 04 KARIM G. ABITAGO, CPA RECEIVABLES

Carrying amount of loan receivable * PV of recoverable amount ** Impairment Loss

xx xx xx

Receivable Financing Definition This refers to the act of inducing cash inflows from the receivables other than collection on a normal basis. Simply stated, it is the financial flexibility of an entity to raise money out of its receivable. Common Forms The following are the common forms of receivable financing: (1) Pledge / Hypothecation (2) Assignment (3) Factoring (4) Discounting Pledge / Hypothecation Characteristics: (1) Receivables serve as collateral security for loans. (Pledge is a secured borrowing transaction) (2) Pledge receivables are not derecognized; thus there is no change in receivable balance. (3) Disclosure of AR pledged is required Frequently asked questions (FAQs): (1) Proceeds from pledge Solution guide: Face value of loan Less: Discount on loan Net proceeds from pledge

xx xx xx

Assignment To properly understand what assignment of receivables is, let us compare it with pledge. Pledge (1) Formal? X (2) Transfer of rights? X (3) Transfer of ownership? x (4) AR serve as security ✔ (General)

Assignment ✔ ✔ x ✔ (Specific)

Features of Assignment: (1) The loanable amount is only a percentage of the face value of AR. (2) Bank charges a service fee or commission in advance. (3) Equity on assigned accounts should be disclosed in notes to FS. Forms of Assignment: (a) Notification basis - debtors whose receivables have been assigned are notified of the assignment. Hence, the debtors will remit payments on the receivables not to the assignor but to the assignee. (b) Non-notification basis - debtors whose receivables have been assigned are NOT notified of the assignment. Hence, the debtors will continue to remit payments on the receivables to the assignor. Assignments are commonly made on a non-notification basis. Frequently asked questions (FAQs): (1) Proceeds from assignment Solution guide: Face value of loan (certain % x face value of AR) Less: Commission and other charges Net proceeds from assignment (2)

xx xx xx

Equity on assigned accounts Solution guide: CA of AR (use the template on AR in computing end. balance) Less: CA of loans payable (Beg. Balance less payments) Equity on assigned accounts

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Page 5 of 10 | FAR Handouts No. 04 KARIM G. ABITAGO, CPA RECEIVABLES

NOTE: Payments on the loan balance come from collections. So if the problem is silent, the whole collections are applied as payment to the loans and there is a separate payment for interest. There will be a problem in the computation of the equity on assigned accounts if the collections are applied as payment for both principal (loan) and interest. As a rule, the payment should be applied first to interest and the remaining collections should be applied to principal. Factoring It is a sale of accounts receivable usually on a without recourse, notification basis to a factor (usually a bank). The factor then assumes responsibility for uncollectible accounts. Forms of factoring (1) Factoring without recourse (if silent) – the transferor is not liable in case the debtor fails to pay. (2) Factoring with recourse – the transferor guarantees payment in the event the debtor fails to pay. Frequently asked questions (FAQs): (1) Proceeds from factoring Solution guide: Face value of AR xx Less: Commission and other charges xx Factor’s holdback* xx Net proceeds from factoring xx * an amount retained by the factor as a cushion for sales returns, discounts and allowances. This is a receivable account. (2)

Gain or loss on factoring Solution guide: Selling Price (Net Proceeds + Factors’ Holdback) Less: CA of AR (NRV) Gain or Loss on Factoring NOTE: There is NO gain or loss on factoring if factoring is on a with recourse basis.

xx xx xx

Discounting This is a transfer or endorsement of a promissory note by the payee in favour of another party, usually a bank. Forms of Discounting

Types of Negotiation

(1) (2)

Without Recourse Basis With Recourse Basis (if silent)

Conditional Sale (if silent) Secured Borrowing

Discounting without recourse basis – the holder is not held liable in the case the maker fails to pay. The note discounted has been essentially sold outright and therefore derecognized. Discounting with recourse basis – the holder is held liable in case the maker fails to pay. The note receivable is not derecognized. (a) Conditional sale – a contingent liability is disclosed in the notes to financial statements. (b) Secured borrowing – a liability is recognized on the discounting.

Frequently asked questions (FAQs): (1) Proceeds from discounting

(2)

Solution guide: Maturity Value (Principal + Total Interest) xx Less: Discount (MV x Discount Rate x Discount Period) xx Net proceeds from discounting xx NOTE: (1) Maturity value is the amount due on the note at the date of maturity. (2) Discount period is the period of time from date of discounting to maturity date. It is the unexpired term of the note. Gain or loss on discounting Solution guide: Selling Price (Net Proceeds) xx Less: CA of NR (including accrued interest) xx

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