TRADE AND OTHER RECEIVABLES In estimating the net realizable value of trade

accounts receivable
Trade
a) Allowance for freight charge
expected to be realized in cash w/in normal
b) Allowance for sales return
operating cycle are current assets
c) Allowance for sales discount
 Accounts Receivable
d) Allowance for doubtful accounts
 Notes Receivable
Terms related to freight charges
Non-Trade
FOB Destination- ownership of the goods
realized in cash WITHIN ONE YEAR and is
purchased is vested upon receipt; seller pays
classified as current assets
the freight charge
 Advances to or from shareholder or FOB shipping point- ownership of the goods
employees- CURRENT ASSETS purchased is vested upon shipment; buyer pays
 Advances to affiliates- LONG TERM the shipping fee
INVESTMENT Freight collect- freight charge is paid by the
 Advances to supplier- CURRENT ASSETS buyer
 Subscription receivables*collectible Freight prepaid- freight charge is paid by the
w/in 1 year- CURRENT ASSETS seller
*a deduction subscribed share capital FREIGHT IN- inventoriable cost
 Creditor account debit balance- FREIGHT OUT- part of selling expense
CURRENT ASSETS
 Special deposits on contract bids- Illustration
NONCURRENT ASSETS 10000 AR
 Accrued income- CURRENT ASSETS Terms are 2/10, n/30, FOB destination, and
 Claim receivables- CURRENT ASSETS freight collect 5000, buyer paid freight charge
 Claims against common carriers for 1. To record sale
losses or damages AR 10000
 Claim for rebates and tax refunds Freight out 5000
 Claim from insurance entity Sales 10K
Customer’s credit balances-current liabilities Allowance
and are not offset against the debit balances For freight charge 5K
and other customer’s accounts 2. To record the collection within discount
 Results from overpayments, returns period
and allowances, and advance Cash 93K
payments from customers Sales discount 2K
INITIAL MEASUREMENT Allowance for
 At FV plus transaction costs Freight charge 5k
Short term receivables FV= face amount or AR 100k
original invoice amount SALES DISCOUNT
SUBSEQUENT MEASUREMENT Gross method
 At amortized costnet realizable  Sale of merchandise100K, terms
value of accounts receivable-the 5/10,n/30
amount of cash expected to be AR 100K
collected or the estimated Sales 100k
recoverable amount  Collection w/in the discount period
 Cash 95K NOTE RECEIVABLE- represents only claims
Sales discount 5K arising from sale of merchandise or service in
AR 100k the ordinary course of business
 Collection with/o discount period
Cash 100k When a promissory note matures and not paid,
AR 100K it is said to be dishonored, and thus should be
Net method removed from the NR account and transferred
1) Sale of merchandise100k,terms to AR
5/10,n/30 Amount DR to AR should include the face
AR 95K amount, interest and other charges
Sales 95K MEASUREMENT
2) Collection w/In discount period -initially at present value which is sum of all
Cash 95K future cash flows discounted using the
AR 95K prevailing market rate (effective interest rate)
3) Collection after the discount period of interest for similar notes.
Cash 100k -short-term notes shall be measured interest
AR 95K value at face value, not discounted
Sales discount
Forfeited 5K Interest bearing NR- measured at face value
Allowance for sales discount which is the PV upon issuance
AR of 100k ate the end of the period, estimated NonInterest bearing NR- at face value which is
discount is 50K. the discounted value of the future cash flows
The adjustment to record the expected sales using the effective interest rate
Sales discount 50K “interest included in the face amount rather
Allowance for sales discount 50K than stated as a separate rate”
Adjustment may be reversed at the beg. Of the
next period in order that discount can then be SUBSEQUENT MEASUREMENT
charged normally to sales discount account -long term note receivableamortized cost
Accounting for bad debts using EIM-
Allowance method- recognition of a bad debt a) minus principal payment
loss if the accounts are doubtful of collection* b) plus or minus cumulative amortization of any
matching principle difference between the initial carrying amount
Doubtful accounts xx and the principal maturity amount
Allowance for D.A xx c) minus reduction for impairment and
A deduction from AR uncollectibility
-long term noninterest-bearing note
If D.A are found to be worthless, the account receivableamortized cost- present value +
are written off: amortization of the discount, or face value –
Allowance for D.A xx unamortized unearned interest income
AR xx
Correction in allowance for doubtful accounts Face value of note xx
-correction is to be reported in the income Pv-cash sale price xx
statement either as an addition to or a Unearned interest income xx
subtraction from doubtful accounts expense.
cash sale price xx
Cost of asset xx
Gain on sale xx
Unearned interest income aka discount on
note receivable
LOAN RECEIVABLE
-financial asset arising from the loan granted by
bank or other financial institution to a borrower
or client
Initial measurement:
- At FV + direct transaction costs
- Fv of LR at initial recognition is the
transaction price or the amount of the
loan granted
Direct transaction cost includes direct
origination costs- included in the initial
measurement of the LR
Indirect origination costsoutright expense
Subsequent measurement:
- Amortized cost using EIM
If the business model in managing financial
asset is to collect contractual cash flows on
specified dates and the contractual cash flows
are solely payments of principal and interest,
the financial asset shall be measured at
amortized cost.
Initial amount< principal amount=difference is
added to the carrying amount
Initial amount> principal amount= difference is
deducted from the carrying amount
origination costs
-fees charged by the bank against the
borrower for the creation of the loan
- include compensation from the following
activities
a) evaluating the borrower’s financial conditions
b) evaluating guarantees, collateral and other
security
c) negotiating the terms of the loan
d) preparing and processing the documents
related to the loan
e) closing and approving the loan transaction
Accounting for origination fees
-origination fees received from the
borrowerunearned interest income
- origination fees not chargeable against the
borrower is aka direct origination costs
Origination fees received exceed the direct
origination costs=unearned interest income;
amortization will increase amortization
Direct Origination costs exceed the origination
fees received= “direct originations costs”;
amortization will decrease interest income
 Direct origination costs and origination fees
received are included in the measurement of
the loan receivable.
Principal amount xx
Origination fees received (xx)
Direct origination costs incurred xx
Initial carrying amount of loan xx
Presentation:
Loan receivable xx
Unearned interest income xx
Carrying amount xx
Carrying amount is actually the amortized cost
IMPAIRMENT OF LOAN
An entity shall recognize a loss allowance for
expected credit losses on financial assessment
measured at amortized cost
An entity shall measure the loss allowance for a
financial instrument at an amount equal to the
lifetime expected credit losses if the credit risk
on that financial instrument has increased
significantly since initial recognition.
Credit losses are the PV of all cash shortfalls.
Expected credit losses are an estimate of credit
losses over the life of the financial instrument.
Measurement of Impairment
a) The probability- weighted outcome
The estimate should reflect the
possibility that a credit loss occurs and
the possibility that no credit loss occurs.
b) The time value of money
The expected credit losses should be
discounted.
c) Reasonable and supportable
information that is available without
undue cost or effort
The amount of impairment loss can be
measured as the difference between
carrying amount and the present value of
estimated future cash flows discounted at
the original effective rate
Computation:
Carrying amount of loan xx
Pv of cash flows xx
Impairment loss xx
JE:
Loan impairment loss xx
Accrued interest receivable xx
Allowance for loan impairment xx
Statement presentation:
Loan receivable xx
Allowance for loan impairment (xx)
Carrying amount xx
THREE STAGE IMPAIRMENT APPROACH
Stage 1- covers debt instruments that have not
declined significantly in credit quality since
initial recognition or that have low credit risk.
A 12-month expected credit loss is recognized
which is the portion of the lifetime expected
credit loss from the default events that are
possible w/in 12mos. After the reporting period.
Stage2 – debt instruments that have declined
significantly in credit quality since initial
recognition but do not have objective evidence
of impairment.
A lifetime expected credit loss is recognized
which is the expected credit loss that results
from all default events over the expected life of
the instrument
-it shall always be recognized for trade
receivables through aging, percentage of
accounts receivable and percentage of sales.
Stage 3- covers debt instruments that have
objective evidence of impairment at the
reporting
Lifetime expected credit loss
Interest income
a) Stages 1 and 2 interest income is
computed based on the gross carrying
amount or face amount
b) Under stage 3 ,it is computed based on
the net carrying amount w/c is equal to
the gross carrying amount or face
amount minus allowance for credit loss.
RECEIVABLE FINANCING
Pledge of AR – pledged as collateral security for
the payment of loan
The borrowing entity makes the collections of
the pledged accounts but may be required to
turnover the collections to the bank in
satisfaction of the loan.
Cash xx
Discount on note payable xx
Note payable xx
If the loan is discounted, the interest for the
term is deducted in advance
Face value of loan xx
Interest deducted in advance (xx)
Net proceeds xx
With respect to pledged accounts, no entry
would be necessary. Disclosure in notes to
financial is enough
Assignment of AR – more formal type of
pledging
-secured borrowing by financing agreement and
a promissory note both which the assignor
assigns
Assignortransfers rights in some AR to a lender
in consideration of loan
Assigneelender
Nonnotification basis-customers are not
informed that their accounts have been
assigned. Thus, customers continue to pay to
the assignor, who remits the payment to
assignee
Notification basis- customers are notified to
make their payments to the assignee directly.
Factoring
-sale of AR on a w/o recourse, notification basis
-an entity sells AR to a bank or finance entity,
the factor.
-factor assumes ownership of the AR
-customers are notified to pay directly to the
factor
Casual factoring
-Entity forced to factor some or all of its AR at a
substantial discount due to critical cash position
in order to obtain much needed cash.
Illustration
An entity factored 500k of AR with an allowance
of doubtful accounts of 10K for 450K
Cash 450k
ADA 10k
Loss on factoring40k
AR 500k
Factoring as a continuing agreement
-where a finance entity purchases all of the AR
of a certain entity.
-Before a merchandise is shipped to a customer,
the selling entity requests the factor’s credit
approval. Hence, if approved, the account is
sold immediately to the factor after shipment of
goods.
The factor assumes the credit function as well
as the collection function
For compensation, the factor charges a
commission or factoring fee of % for its services
of credit approval billing, collecting and
assuming uncollectible factored accounts
Such amount is “factor’s holdback”.a
receivable from factor and classified as current
asset.
Final settlement of it is made after the factored
receivable have been fully collected.
Gross amount xx
Less: Sales discount xx
Commission xx
Factor’s holdback xx (xx)
Cash received from factoring xx
Discounting
Maker-one liable
Payee- entitled to payment on date of maturity
Endorser-payee
Bank -endorsee
To discount a note, the payee must endorse it.
Endorsement-the transfer of right to a
negotiable instrument by simply signing at the
back of the instrument.
Endorsement with recourse-the endorser shall
pay the endorsee if the maker dishonors the
note
Endorsement w/o recourse- endorser avoids
future liability even if the maker refuses to pay
the endorsee on the date of maturity.
Terms related to discounting of note
1) Proceeds- discounted value of NR by
the endorser from the endorsee
Proceeds= Maturity value minus discount
2) Maturity value= amount due on the
note at the date of maturity
Principal+ interest=maturity value
3) Maturity date
4) Principal= amount appearing on the
face of the note, aka Face value
5) Interest= principal x rate x time
6) Interest rate= appearing on the note
7) Time= period from date of note to
maturity
8) Discount= maturity value x discount
rate x discount period
9) Discount rate=rate used by the bank in
computing discount. If no discount rate,
interest rate is assumed as the discount
rate
10) Discount period=period of time
=term of the note- expired portion up to the
date of discounting
-unexpired term of the note
Gain or loss= Net proceed- carrying amount
of NR
If the discounting is with recourse,
transaction is either of the following:
a) Conditional sale of NR recognizing a
contingent liability
Cash xx
Loss on NR discounting xx
NR discounted xx
Interest income xx
NR discounted is deducted from the
total NR when preparing the SFP with
disclosure of contingent liability
b) Secured borrowing
-the NR is not derecognized but instead
an accounting liability is recorded at an
amount equal to the face amount of the
NR discounted.
Cash xx
Interest expense xx
Liability for NR discounted xx
Interest income xx
There is no gain or loss on discounting
if NR discounting is accounted for as
secured borrowing
Conditional sale or secured borrowing
Financial asset is derecognized when
either of the criteria is met:
a) The contractual rights to the cash
flows of the financial asset have
expired.
b) The financial asset has been
transferred and the transfer
qualifies for derecognition based on
the extent of transfer of risks and
rewards of stewardship.
Guidelines for derecognition based on transfer
of risks and rewards:
a) If the entity has transferred
substantially all risks and rewards, the
financial asset shall be derecognized.
b) If the entity has retained substantially
all risks and rewards, the financial asset
shall not be derecognized
c) If the entity has neither transferred or
retained substantially all risk and
rewards, derecognition depends on
whether the entity has retained
control of the asset.
1) If the entity has lost control of the
asset, the financial asset is
derecognized in its entity.
2) If the entity has retained control
over the asset, the financial asset is
not derecognized.
The discounting transaction is a combination of
the guidelines in the second criterion as follows:
a) Entity has substantially transferred all
rewards
b) Entity has retained substantially
c) The entity has lost control of the NR