FINANCIAL ACCOUNTING AND REPORTING

TOPIC 4: RECEIVABLES
RELATED STANDARDS: PFRS 9 – FINANCIAL INSTRUMENTS

DEFINITION

MEASUREMENT
RECEIVABLES IN GENERAL
CLASSIFICATION

PRESENTATION
ACCOUNTS RECEIVABLE

RECEIVABLES MEASUREMENT
LOANS RECEIVABLE
IMPAIRMENT OF LOANS

PLEDGING

ASSIGNMENT
RECEIVABLE FINANCING
FACTORING

DISCOUNTING

RECEIVABLES IN GENERAL

Definition Measurement
Receivables are financial assets because they Initial Measurement Subsequent Measurement
represent a contractual right to receive cash or Fair Value + Transaction Costs Amortized Cost
another financial asset from another entity.

Classification Presentation
1. Trade Receivables – are receivables arising from the sale of goods and All trade and current non-
services in the ordinary course of business. Presentation on the FS: classified as trade receivables are
current assets when they are expected to be realized in cash within the normal presented in one line item in
operating cycle or one year, whichever is longer. the current asset section of the
2. Non-Trade Receivables – are receivables arising from sources. Presentation on Statement of Financial
the FS: classified as current asset when they are expected to be realized in cash Position as “Trade and Other
within one year, the length of the operating cycle notwithstanding. Receivables”.

Presentation if the problem is SILENT

Advances to shareholders Non-current asset
Advances to affiliates Long-term investment
Advances to suppliers Current asset
Subscription receivable Deduction from SHE unless short term presented as Current Asset
Debit balances in AP Current asset
Accrued income Current asset
Claims receivables Current asset
Claims receivables Current asset unless long-term presentated as Non-current Asset

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 ACCOUNTS RECEIVABLE

Initial Measurement – Transaction Price / Invoice Price

A. To compute invoice price, it should be net of trade discount or volume discount and net of cash discount if the
company is using net method.

Solution Guide: Accounting for Cash Discounts

List Price XXX 1. Gross Method – Under this method, accounts receivable and sales are
Less: 1st Trade Discount XXX initially recorded ad amounts gross of cash discounts. Cash discounts
Balance XXX are recorded only when taken by the buyer.
Less: 2nd Trade Discount XXX 2. Net Method – Under this method, accounts receivable and sales are
Invoice Price XXX initially recorded at amounts net of cash discounts.

Gross Method Net Method

Sales are initially recorded at the invoice amount Sales are initially recorded at the invoice amount, net of
sales discount, whether taken or not by the customer.
When the discount is taken, sales discount will be debited in When the discount is taken, a simple entry crediting
addition to crediting receivable and debiting cash receivable (net of sales discount) and debiting cash will be
made
When the discount is not taken, a simple entry of debiting When the discount is not taken, sales discount lost will be
cash and crediting receivable will be made credited in addition to debiting cash and crediting receivable
Sales discount is usually reported as a reduction of gross Sales discount lost is usually reported as part of other
sales when computing net sales income
Based on operational efficiency as an entity is not required Conceptually correct as the receivable is already stated in
to trace the invoice in which a sales discount relates. In cash price (sales discount is considered as financing
addition, in practice, the total amount of sales discounts are component)
immaterial for an entity to do monitoring.

SUMMARY OF JOURNAL ENTRIES

GROSS METHOD NET METHOD
Accounts Receivable XX Accounts Receivable XX
Sale on Account
Sales XX Cash XX
Cash XX Cash XX
Assume collected
Sales Discount XX Accounts Receivable XX
within discount period
Accounts Receivable XX
Cash XX Cash XX
Assume collected
Accounts Receivable XX Sales Discount Forfeited/Loss XX
beyond discount period
Accounts Receivable XX

B. Credit balances or negative balances in accounts receivable resulting from overpayments or advances 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 balances of accounts receivable, please see the below template.

Accounts Receivable
Beginning Balance XX Collections XX
Credit Sales XX Sales Discount XX
Sale Discount Forfeited Sales Return XX
Note as Payment XX
Write-Off XX
End. Balance XX

Note: (1) Sales discount forfeited account and sales discount account cannot be shown on the template at the same
time. Sales discount account appears only if the company is using gross method while sales discount forfeited
account appears only if the company is using net method. (2) If there is recovery of previously written-off account, it
is not on the template because it will not affect the total balance of AR unless it is part of collections (deduct the
recovery from collections).

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 B. These are four types of allowances:
1. Allowance for Sales Returns 3. Allowance for Freight Charge
2. Allowance for Sales Discounts 4. Allowance for Doubtful Accounts
Note:
1. Entry for Allowance for Sales Sales Returns XX
Returns Allowance for Sales Returns XX
2. Entry for Allowance for Sales Sales Discount XX
Discount Allowance for Sales Returns XX
3. Allowance for Freight Charge – results when the shipping term is FOB Destination, Freight Collect.

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.f

4. Allowance for Doubtful Accounts Percent of AR

Method (ADA)
Balance Sheet
Direct Write – Method
Aging Method
Off Method (ADA)
Accounting for
Bad Debts Allowance
Method Income Statement Percent of Credit
Method Sales Method (DAE)

Mixed

SUMMARY OF JOURNAL ENTRIES

DIRECT WRITE – OFF ALLOWANCE METHOD
Collectability becomes XX Bad Debts Expense XX
No Entry
doubtful XX Allowance for Bad Debts XX
Bad Debts Expense XX Allowance for Bad Debts XX
Write – Off
Accounts Receivable XX Accounts Receivable XX
Accounts Receivable XX Accounts Receivable XX
BDE/Gain XX Allowance for Bad Debts XX
Recovery
Cash XX Cash XX
Accounts Receivable XX Accounts Receivable XX

Note:
1. Only the allowance method is in accordance with PFRS, thus direct write-off is not used for PFRS reporting
purposes. Direct write-off method is only used for taxation purposes.
2. Recoveries do not have an effect on the grass balance of AR, net income and working capital.
3. Bad debt expense is generally presented as administrative expense, it presented as a selling expense if the
sales manager has the authority to grant credit.

To compute the ending gross balance of allowance for doubtful accounts, please see the below template.
Allowance for Doubtful Accounts (ADA)
Write – Off XX Beginning Balance XX
Doubtful Account Expense (DAE) XX
Recovery XX
End. Balance

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 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
Subsequent
CLASSIFICATION Initial Measurement
Measurement
Interest Bearing
Short – Term
Non-Interest Bearing* Face Value
With reasonable rate f 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.
f
In computing present value, follow these steps:
1. Know the future cash flows.
For long-term non-interest bearing note receivable, there is only one cash flow, the "as if principal".
For long-term interest bearing note receivable with unreasonable rate, there are two cash flows; the "as if principal"
and nominal interest.

2. Know the timing of the cash flows. – This step will help you significantly in applying step 3.

3. Compute present value factors.

When to use present value factors?

PV of 1- when the CF's timing is lump-sum PV of Ordinary Annuity of 1-when the CF's timing is annual and equal
without interruption and the first CF is to be paid 1 period after.
PV of Ordinary Annuity due – when the CF’s timing is annual and equal without interruption and the first CF is to be
paid today.

4. Compute the present value (STEP 1 X STEP 3)

LOANS RECEIVABLES

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 XX
Add: Direct Origination Costs XX
Less: Origination Fee (XX)
Initial Carrying Value (ICV) XX

Subsequent Measurement – Amortized Cost

NOTE:
1.
IF Scenario Interest Treatement on Amortization
ICV > Face Value Premium Nominal Interest > Effective Interest Deduct from CA
ICV < Face Value Discount Nominal Interest < Effective Interest Add to CA

2. 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 loand

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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:

Objective evidence of impairment may result from the following "loss events" occurring after the initial recognition of the financial
asset:
1. Significant financial difficulty of the issuer or obligor
2. Breach of contract, such as default or delinquency in interest or principal payment.
3. Debt restructuring
The lender, for economic or legal reason relating to the borrower's financial difficulty, grants to the borrower a
concession that the lender would not otherwise consider.
4. Probability that the borrower will enter bankruptcy or other financial reorganization.
5. The disappearance of an active market for the financial asset because of financial difficulty
6. Measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition,
although the decrease cannot yet be identified with the individual financial assets in the group.

How to compute impairment loss?

Carrying Amount of Loan Receivable * XX
PV of Recoverable Amount ** XX
Impairment Loss XX

"Carrying amount of loan receivable must include any related accrued interest income.

*The PV of the recoverable amount shall be computed using the ORIGINAL EFFECTIVE INTEREST RATE.

NOTE: After the recognition of impairment, the new carrying amount of the loan is the PV of the recoverable amount amortized
using the effective interest method.

RECEIVABLE FINANCING

Definitions: 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:
1. Pledge / Hypothecation 3. Factoring
2. Assignment 4. Discounting

NOTE: 1 – 3 are forms applicabke for accounts receivable while 4 is applicable for notes receivable only.

PLEDGE / HYPOTHECATION

Characteristics Frequently Asked Questions (FAQs)

1. Receivables serve as collateral security for loans. (Pledge is a secured 1. Proceeds from pledge
borrowing transaction)
2. Pledge receivables are not derecognized, thus there is no change in
receivable balance.
3. Disclosure of AR pledged is required.

Solution Guide:
Face Value of Loan XX
Less: Discount on Loan XX
Net Proceeds from Pledge XX

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ASSIGNMENT

To properly understand what assignment of receivable is, let us compare it with pledge.
PLEDGE ASSIGNMENT
1. Formal? X 
2. Transfer of Rights? X 
3. Transfer of Ownership? X X
4. AR serve as security?  
(General) (Specific)

Features of Assignment Forms of Assignment

1. The loanable amount is only a 1. Notification Basis – debtors whose receivables have been assigned are
percentage of the face value of AR. notified of the assignment Hence, the debtors will remit payments on the
2. Bank charges a service fee or receivables not to the assignor but to the assignee.
commission in advance. 2. Non-Notification Basis – debtors whose receivables have been
3. Equity on assigned accounts should assigned are NOT notified of the assignment Hence, the debtors will
be disclosed in notes to FS. 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) XX
Less: Commission and Other Charges XX
Net Proceeds from Assignment XX

2. Equity on assigned accounts

Solution Guide:
CA of Ar (use the template on AR in computing end. Balance) XX
Less: CA of Loans Payable (Beg. Balance less Payments XX
Equity on Assigned Accounts XX

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
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 + Factor’s Holdback) XX
Less: CA of AR (NRV) XX
Gain or Loss on Factoring XX
NOTE: There is NO gain or loss on factoring if factoring is on a with recourse basis.
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DISCOUNTING

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

Forms of Discounting

Without Recourse Basis

Types of Negotiation Conditional Sale (if silent)

With Recourse Basis (if silent)

Secured

1. 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.
2. 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
Solution Guide:
Maturity Value (Principla + 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.

2. Gain or loss on discounting

Solution Guide:
Selling Price (Net Proceeds) XX
Less: CA of AR (including accrued interest) XX
Gain or Loss on Discounting XX

NOTE: There is NO gain or loss on factoring if factoring is on a with recourse basis – secured borrowing. (To explain
this, please refer to the summary of entries below)

Without Recourse Conditional Sale Secured Borrowing

Cash XX Cash XX Cash XX
Loss on Discounting XX Loss on Discounting XX Interest Expense XX
Notes Receivable XX Notes Receivable Liability for NR
Gain on Discounting XX Discounted XX Discounted XX
Interest Income XX Gain on Discounting XX Interest Income XX
Interest Income XX Interest Income XX

NOTE:
1. Note receivable discounted account is presented as a contra-asset account (deducted from note receivable account).
2. Based on the entries above, gain or loss on discounting is applicable only to without recourse basis and conditional
sale basis.

Dishonored Notes

Notes receivable not collected at maturity are considered dishonoured notes. Dishonoured notes are transferred from
notes receivable to accounts receivable the amount of which is equal to the maturity value of the note plus any direct
costs or protest fees.