FINANCIAL ACCOUNTING AND REPORTING

RECEIVABLES

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 Financial 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 within Cash 7,056 Cash 7,056
discount period Sales Discount 144 Accounts Receivable 7,056
Accounts Receivable 7,200
(3) Assume collected Cash 7,200 Cash 7,200
beyond discount period Accounts Receivable 7,200 Sales Discount 144
Forfeited 7,056
Accounts Receivable
(b) 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 Collections xx
Credit Sales xx Sales Discount xx
Sale Discount Forfeited Sales Return xx
Notes As Payment xx
Write-off xx
End. Balance 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

Percent of AR
Method (ADA)
Balance Sheet
Direct Write-off Method
Aging Method
Method
Accounting for (ADA)
bad debts
Allowance Income Percent of Credit
Method Statement Sales Method
Method (DAE)

Mixed

Direct Write-off Allowance

(1) Collectability becomes No Entry Bad Debts Expense xx
doubtful Allowance for BD xx
(2) Write-off Bad Debts Expense xx Allowance for BD xx
Accounts Receivable xx Accounts Receivable xx
(3) Recovery Accounts Receivable xx Accounts Receivable xx
BDE/Gain xx Allowance for BD xx
Cash xx Cash xx
Accounts Receivable xx Accounts Receivable xx
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
(DAE) xx
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 with unreasonable rate**
Long-term
Non-interest bearing Present Value
*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 xx
Add: Direct Origination Costs xx
Less: Origination Fee (xx)
Initial Carrying Value (ICV) xx

Subsequent Measurement
Amortized Cost

NOTE:
(1)
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
(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 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?
Carrying amount of loan receivable * xx
PV of recoverable amount ** xx
Impairment Loss 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 xx
Less: Discount on loan xx
Net proceeds from pledge xx

Assignment
To properly understand what assignment of receivables 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:
(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) 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.
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) 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.

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
Without
Recourse Basis
Types of Conditional
Negotiation Sale (if silent)
With Recourse
Basis (if silent)
Secured
Borrowing
(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 (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.
(2) Gain or loss on discounting
Solution guide:
Selling Price (Net Proceeds) xx
Less: CA of NR (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)
 Summary of Entries on Discounting

WITHOUT RECOURSE CONDITIONAL SALE SECURED BORROWING

Cash xx Cash xx Cash xx
Loss in Discounting xx Loss in Discounting xx Loss in Discounting xx
Notes Receivable xx Notes Receivable Notes Receivable
Gain on Discounting xx Discounted xx Discounted xx
Interest Income xx Gain on Discounting xx Gain on Discounting 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.