ACCOUNTING OF RECEIVABLE

Definition

1. Receivables are financial assets and financial instruments. They represent a

contractual right to receive cash or another financial asset from another entity. They
are defined as claims held against customers and others for money, goods, or
services.
2. Receivables may generally be classified as follows:

According to Sources:
a. Trade receivables (accounts receivable and notes receivable) are the most
significant receivables an enterprise possesses. They arise from sale of
merchandise or services in the ordinary course of business. These come from
the entities customers.
b. Nontrade receivables arise from a variety of transactions other than from sale
of merchandise or services in the ordinary course of business.
1. Advances to Shareholders, directors or officers
2. Advances to Affiliates
3. Advances to Suppliers
4. Subscription Receivables
5. Creditors’ Account with debit balance
6. Special deposits
7. Accrued Income such as dividend, rent, royalties and others
8. Claims from common carrier, tax, rebates, insurance and others

c. Loans Receivable- receivable from customers of banks and other financial

institutions who made loans to different entities where repayments are made
frequently longer period or take several years.

According to Form
a. Accounts Receivable are oral promises of the purchaser to pay for goods and
services sold. The source documents generally used for recording is the seller’s
sales invoice.
b. Notes receivable are written promises to pay a certain sum of money on a
specified future date. Nontrade receivables are generally classified and reported
as separate items in the statement of financial position.

According to its due Date of Collectibility

a. Current Receivable- This includes all trade receivables and those non-trade
receivables that are collectible within one year from the balance sheet (PAS1).
This includes also receivables whose contract defaulted.
 b. Non- Current Receivables – Includes Non-trade receivables collectible
beyond one year from the balance sheet.

Recognition

1. Trade Receivables (This is governed by IFRS 15 Revenue from Contracts with

Customers)
Five steps are used to apply the principle in IFRS 15
1. Identify the contract with a customer
a. A contract is an agreement that creates legally enforceable rights and
obligations. The contract need not be a written document. Rights and obligations
can also be implied from normal business practices such as advertisements or
implicitly based on typical current or past business practices that a company uses
to sell products or services.

2. Identify the performance obligation(s) in the contract.

a. Performance obligations are promises that the seller makes to the customers in
the contract. A contract could obligate a seller to provide multiple goods and
services.

b. Sellers account for performance obligations separately if the performance

obligations are distinct.

c. Prepayments are not separate performance obligations because they aren’t a

promise to transfer a product or service to a customer. Instead, it is an advance
payment for future products or services to be allocated to the various performance
obligations in the contract and recognized as revenue when each performance
obligation is satisfied.

d. Right of return is not a separate performance obligation. Instead, it represents a

failure to satisfy the performance obligation to deliver satisfactory goods. As a
result, sellers need to estimate the amount of product that will be returned and
account for those returns as a reduction in revenue and as a refund liability.

e. Quality assurance warranties are not separate performance obligations. Rather,

they are viewed as a cost of satisfying the performance obligation to deliver
products of acceptable quality. Therefore, the seller recognizes in the period of
sale an expense and related liability for these warranties.
i. However, extended warranties do qualify as separate performance
obligations because they represent additional services that could be (and
often are) sold separately.

f. An option for additional goods and services is a separate performance obligation

if it confers a material right to the buyer.
i. The option must be attractive to the customer for it to be a material right. An
example is the frequent flyer points of an airline company.

3. Determine the transaction price.

a. Variable consideration should be included in the transaction price by

estimating it with either the expected value (probability-weighted amount) or the
most likely amount, depending on which measure better predicts the amount that
 the seller will receive. If there are many possible outcomes, a probability-
weighted amount will be more appropriate.

b. IFRS 15 requires noncash consideration to be measured at fair value. If the

fair value cannot be reliably estimated, the selling company should use the
stand-alone selling prices of the goods and services to indirectly infer the
consideration received. The indirect method is not as reliable as the direct
method and should be used only if a reliable measure of fair value is not
available.

c. A consideration payable to a customer (in a form of coupon or voucher) is

actually a rebate for future sale transaction and reduces the revenue on actual
sale date. IFRS 15 requires the reduction in transaction price to be recognized at
the later of:
i. transfer of goods and services to customer and
ii. date of payment or promised date of payment.

d. When time value of money is significant, a sales transaction is viewed as

including two parts: a delivery component (for goods or services) and a financing
component (either interest paid to the buyer in the case of a prepayment or to the
seller in the case of a receivable).

4. Allocate the transaction price to each performance obligation.

a. If an arrangement has more than one separate performance obligation, the

seller allocates the transaction price to the separate performance obligations in
proportion to the stand-alone selling price of the goods or services underlying
those performance obligations.

b. When the stand-alone selling price of a performance obligation is uncertain,

the seller may estimate it using the residual method, by subtracting the stand-
alone selling price of the other performance obligation from total contract price.

c. In the presence of contract modification, the impact of these modifications is

determined with the following two questions:
i. Does the company now have an obligation to transfer distinct goods or
services?
ii. Is there an increase in contract price that is equal to the stand-alone
price of the additional promised goods and services?

d. If the answer to both questions is positive, contract modification is accounted

for as a new separate contract.

e. If the additional goods or services are distinct but the additional price does not
reflect the stand-alone prices, the discount or premium is spread over the
remaining units from the existing contract and the new units from the contract
modification. Effectively, we are accounting for as if we terminated the old
contract and transferring the remaining obligations to the new contract.

f. If the additional goods or services are not distinct and regardless of whether
the additional price reflects their stand-alone prices, these goods or services are
a single performance obligation with the goods and services as originally
contracted. We adjust the total transaction price (i.e., the remaining contract price
 on unperformed obligations plus the additional contract price from the
modification) and allocate it progressively to the remaining obligations.
i. Revenue recognized previously is not adjusted.

5. Recognize revenue when (or as) each performance obligation is satisfied.

a. Recognizing revenue at a single point in time

i. The performance obligation is satisfied when control of the goods or
services is transferred from the seller to the customer.
ii. Usually transfer of control is obvious and coincides with delivery.
iii. The customer is more likely to control a good or service if the customer
has:
√ an obligation to pay the seller,
√. legal title to the asset,
√. physical possession of the asset,
√. assumed the risks and rewards of ownership, and
√. accepted the asset.

iv. When more than one company is involved in providing goods or

services to a customer, we need to determine whether the company is
acting as a principal or as an agent. IFRS 15 provides the following “clues”
to determine whether a party is a principal or agent.
√. The principal is the party who is primarily responsible for fulfilling
the contractual promises to the customer.
√. The principal, and not the agent, bears inventory risks before
transfer takes place and after returns (if any) are made.
√. The principal has the right to set prices for the goods and
services.
√. The agent’s consideration is in the form of a commission.
√. The agent is not exposed to credit risk from accounts receivable.

v. In a consignment arrangement, the consignor physically transfers the

goods to the other company (the consignee), but the consignor retains
legal title. The consignor recognizes revenue only when control is
transferred to the ultimate customer. IFRS 15 states that indicators of a
consignment arrangement include, but are not limited to the following
factors:
√. Product is under the control of the consignor until a specific
event occurs.
√.The consignor is able to require the return of the product or the
transfer to another dealer.
√. The consignee does not have an unconditional obligation to pay
for the product.

vi. For non-refundable upfront payments, fee paid is a contract liability

(deferred or unearned revenue) until the services are rendered.

vii. In a franchise arrangement, a franchisor grants to the franchisee the

right to sell the franchisor’s products and use its name. The fees to be
paid by the franchisee to the franchisor usually comprise (1) an initial
franchise fee and (2) continuing franchise fees.
 √. If the initial fee is collectible in installment over an extended
period of time. It is necessary to consider (1) the uncertainty of
cash collection and (2) the time value of money.

viii. Customers sometimes pay a licensing fee to use a company’s

intellectual property (“IP”). Licenses are common in software, technology,
media, and entertainment industries. Sometimes, a license isn’t
considered to be a separate performance obligation because it’s not
distinct from other goods or services provided in the same transaction.
However, if the licenses are distinct from other goods or services, we have
to determine whether the performance obligation is satisfied over time or
at a point in time.
√. Right-of-use licenses may satisfy performance obligations
differently from right-of-access licenses. The benefit the customer
receives from the license isn’t affected by the seller’s ongoing
activity.
√. Right-of-access licenses require ongoing activities by the seller.
The seller will undertake ongoing activities during the license period
that benefit the customer.

ix. A bill-and-hold arrangement occurs when the customer is billed for the
goods but does not have physical possession. For bill-and-hold
arrangements, the key issue is whether the customer has obtained control
of the goods, even though the seller has physical possession of the items.
In addition to asking the overriding question relating to control, sellers
need to ask some tough questions required by IFRS 15 to justify
recognizing revenue:
√. Was there a genuine reason for the bill-and-hold arrangement?
Fundamentally, was it the customer who initiated this arrangement?
√. Can the product be identified separately as belonging to the
customer?
√. Is the product ready to be delivered to the customer?
√. Does the seller have the ability to use the product or to direct it to
another customer? If the answer to any of the questions is “no”, the
seller has to conclude that control has not been transferred and
revenue should not be recognized.

x. In a sale and repurchase agreement, control is not transferred to the

customer. IFRS 15 requires us to analyze the real nature of the
transaction as follows:
√. If the discounted value of the repurchase price is higher than the
sale price, the arrangement is a financing arrangement, with the
difference between the two prices being a financing cost.
√. If the discounted value of the repurchase price is lower than the
sale price, the arrangement is a leasing arrangement, with the
difference between the two prices being the lease rental for the
item.

b. Recognizing revenue over a period of time

i. In a contract, there may be occasion when much of the activities performed by

the companies to generate revenue occur throughout a period rather than at a
point in time Hence, IFRS 15 requires a company to test whether its performance
 obligation is satisfied over time or satisfied at a point in time. If performance
obligation is satisfied over time, the company reports revenue on a progressive
basis as the performance obligations are satisfied.

ii.A performance obligation is satisfied over time if at least one of the three criteria
specified in IFRS 15 paragraph 35 is met.
√. Simultaneous receipt and consumption of benefits by the customer as
the seller provides the benefits.
√. The seller is involved in the process of creating or enhancing an asset
that the customer controls.
√. The seller creates an asset that has no alternative use to the seller and
the seller has an enforceable right to payment for the work done to date
on the asset from the customer.

2. In most receivable transactions, the amount to be recognized is the exchange

price (amount due from the debtor) between the two parties. Two elements that must
be considered in measuring receivables are (a) the availability of discounts (trade
and cash) and (b) the length of time between the sale and the payment due date (the
interest element).

How to initially record receivable.

There are two methods of initial recording of receivable.

a. The gross method records sales and accounts receivable at the gross amount of
a sale (Invoice Price). Cash Sales discounts are recognized if the customer
pays within the discount period. Cash Sales Discounts are reported on the
income statement as a deduction from Sales in the determination of net sales.
(List Price – Trade Discount)

b. The net method records sales and accounts receivable at an amount net of any
cash discount. If the customer does not pay within the discount period, Sales
Discounts Forfeited is debited for the lost discount. Sales Discounts Forfeited is
reported on the income statement under the other expense and income
section. (List Price – Trade Discount – Cash Discount)

 Trade discounts represent reductions from the list or catalog prices of

merchandise. They are often used to avoid frequent changes in catalogs or to
quote different prices for different quantities purchased and to encourage buyers
to buy in volume.
 Cash discounts (also called sales discounts) are offered as an inducement for
prompt payment and are communicated in terms that read, for example, 2/10,
n/30 (2%discount if paid within 10 days of the purchase or invoice date,
otherwise the gross amount is due in 30 days).
 On January 1, 2020, ABC Company sells 20 units merchandise to DEF
Company, for a total list price of P 200,000, under 20%,30%, 2/10, 1/15,
n/30.
GROSS METHOD NET METHOD
Jan. 1 A/R 112,000 A/R (112,000 x .98) 109,760
Sales 112,000 Sales 109,760

 200,000 x .80 x .70

= 112,000
If 4 units were returned Sales Return 22,400 Sales Return 21,952
A/R A/R 21,952
22,400
109,760 x 4/20 = 21,952
112,000 x 4/20 = 22,400
If paid within the Cash 87,808 Cash 87,808
discount period Sales Discount 1,792 A/R 87,808
A/R
89,600

(112,000 – 22,400) =
89,600 x .02 = 1,792
discount
Payment = 89,600 –
1,792= 87,808

If paid beyond the Cash 89,600 Cash 89,600

discount period A/R 89,600 A/R 87,808
Forfeiture of Discount 1,792

Sales 112,000 Sales 109,760

If paid within the Sales Return Sales Return ( 21,952)
discount period ( 22,400) Sales Discount __________
Sales Discount ( 1,792) Net Sales 87,808
Net Sales 87,808
If paid beyond the Sales 112,000 Sales 109,760
discount period Sales Return Sales Return ( 21,952)
( 22,400) Sales Discount __________
Sales Discount Net Sales 87,808
________ Other Income 1,792
Net Sales 89,600 Total Income 89,600

Freight On Board (Transportation)

If the transaction above shall include P 20 per unit transportation per way.
 Freight Agreement BUYER SELLER
FOB Shipping Point Prepaid Freight In 400 A/R 400
A/P 400 Cash 400
FOB Shipping Point Collect Freight In 400 No Entry
Cash 400
FOB Destination Prepaid No Entry Freight Out 400
Cash 400
FOB Destination Collect A/P 400 Freight Out 400
Cash 400 A/R 400

Who Should Pay the Transportation ? FOB Shipping Point (Buyer)

FOB Destination ( Seller)

Who Pay First ? Prepaid (Seller)

Collect ( Buyer)

RULE: NO DISCOUNT FOR RETURNS AND FREIGH

EXERCISES: (PASS THIS ON OR BEFORE 11:30 TODAY TO MY EMAIL ADD.)

Creditor Company sells merchandise to Debtor Company on credit under the

term 10%, 10%, 5/10, 2/15, n/30. The goods have a list price of P 1,000 in addition
to a freight of P 50 each way. The following transactions occurred:

September 11, 2020 Deliver 50 units of the product to the buyer.

September 18, 2020 Received 20 merchandise from buyer since goods

delivered
Is not the correct specification and the seller is in
default.

Answer the following :

1. If the term is FOB Shipping Point Prepaid. How much is the total billing of
the seller including the freight using gross method.

2. Prepare the entry for no. 1 above.

3. If the term is FOB Destination Collect. Prepare the entries of the seller
using the net method under the following transactions

a. September 11, 2020

b. September 18,2020

c. If payment is received September 20, 2020

d. If Payment is received September 25,2020