RECEIVABLES

RECEIVABLES:
are financial assets that represent a
contractual right to receive cash or other
financial assets from another entity.

For retailers or manufacturers, receivables are

classified into trade receivables and nontrade
receivables.
TRADE RECEIVABLES

 REFER TO CLAIMS ARISING FROM SALE OF

MERCHANDISE OR SERVICES IN THE ORDINARY
COURSE OF BUSINESS. IT INCLUDES ACCOUNTS
RECEIVABLE AND NOTES RECEIVABLE.

 WHICH ARE EXPECTED TO BE REALIZED IN CASH

WITHIN THE NORMAL OPERATING OR ONE YEAR
WHICHEVER IS LONGER, ARE CLASSIFIED AS
CURRENT ASSETS.
NONTRADE RECEIVABLES
 REPRESENT CLAIMS ARISING FROM SOURCES
OTHER THAN THE SALE OF MERCHANDISE OR
SERVICES IN THE ORDINARY COURSE OF
BUSINESS.

 WHICH ARE EXPECTED TO BE REALIZED IN CASH

WITHIN ONE YEAR, THE LENGTH OF OPERATING
CYCLE NOTWITHSTANDING, ARE CLASSIFIED AS
CURRENT ASSETS. IF COLLECTIBLE BEYOND ONE
YEAR, ARE CLASSIFIED AS NON-CURRENT ASSETS.
EXAMPLES OF NONTRADE RECEIVABLES

 ADVANCES TO OR RECEIVABLES FROM

SHAREHOLDERS, DIRECTORS, OFFICERS/EMPLOYEES.
 ADVANCES TO AFFILIATES (LONG-TERM INVESTMENT)
 ADVANCES TO SUPPLIERS
 SUBSCRIPTIONS RECEIVABLE ARE CURRENT ASSET –
WITHIN ONE YEAR. IF NOT, DEDUCTION FROM
SUBSCRIBED SHARE CAPITAL.
 DEBIT BALANCE OF ACCOUNTS PAYABLE
 SPECIAL DEPOSITS ON CONTRACT BIDS
 ACCRUED INCOME
 CLAIMS RECEIVABLES
INITIAL MEASUREMENT
 INITIALLY AT FAIR VALUE PLUS TRANSACTION COSTS
THAT DIRECTLY ATTIBUTABLE TO THE ACQUISITION.
✓ SHORT TERM RECEIVABLES, FAIR VALUE IS EQUAL TO
FACE VALUE OR ORIGINAL INVOICE
✓ LONG-TERM RECEIVABLES (INTEREST BEARING), FACE
VALUE.
✓ LONG-TERM RECEIVABLES (NONINTEREST BEARING),
PRESENT VALUE OF ALL FUTURE CASH FLOWS
DISCOUNTED USING THE PREVAILING MARKET RATE
OF INTEREST FOR SIMILAR RECEIVABLES.
SUBSEQUENT MEASUREMENT

 NET REALIZABLE VALUE (ACCOUNTS

RECEIVABLE LESS FREIGHT CHARGES,
SALES RETURNS, SALES DISCOUNT AND
ALLOWANCE FOR DOUBTFUL
ACCOUNTS)
ACCOUNTING FOR BAD DEBTS
 ALLOWANCE METHOD
✓ DOUBTFUL OF COLLECTION
Bad debts exp. XX
Allowance for bad debts XX
✓ WORTHLESS/UNCOLLECTIBLE
Allowance for bad debts XX
Accounts receivable XX
✓ RECOVERY
Accounts receivable XX
Allowance for bad debts XX
Cash XX
Accounts receivable XX
 DIRECT WRITEOFF METHOD
✓ DOUBTFUL OF COLLECTION
-NO ENTRY-
✓ WORTHLESS/UNCOLLECTIBLE
Bad debts expense XX
Accounts receivable XX
✓ RECOVERY
Accounts receivable XX
Bad debts expense XX
Cash XX
Accounts receivable XX
METHODS OF ESTIMATING BAD DEBTS

 AGING/PERCENTAGE OF ACCOUNTS
RECEIVABLE (BALANCE SHEET APPROACH) –
✓ REQUIRED ALLOWANCE/ ALLOWANCE FOR
BAD DEBTS, END

 PERCENTAGE OF SALES (INCOME STATEMENT

APPROACH) –
✓ BAD DEBTS EXPENSE, END
DEBIT BALANCE IN THE ALLOWANCE ACCOUNT

 THE ALLOWANCE ACCOUNT NORMALLY HAS

CREDIT BALANCE. HOWEVER, IN CERTAIN
INSTANCES, IT MAY HAVE DEBIT BALANCE
BECAUSE IT MAY BE THE POLICY OF THE
ENTITY TO ADJUST THE ALLOWANCE AT THE
END OF THE PERIOD AND RECORDS
ACCOUNTS WRITTEN OFF DURING THE YEAR.
 T-account: ACCOUNTS RECEIVABLE

ACCOUNTS RECEIVABLE
DEBIT CREDIT
BEGINNING BALANCE XXX XXX SALES RETURN AND ALLOWANCES
SALES ON ACCOUNT XXX XXX SALES DISCOUNTS
RECOVERIES XXX XXX COLLECTIONS INCLUDING
RECOVERIES
XXX ACCOUNTS WRITTEN OFF
XXX ENDING BALANCE
T-ACCOUNT: ALLOWANCE FOR
DOUBTFUL ACCOUNTS

ALLOWANCE FOR DOUBTFUL

ACCOUNTS
DEBIT CREDIT
ACCOUNTS WRITTEN OFF XXX XXX BEGINNING BALANCE
XXX DOUBTFUL ACCOUNTS EXPENSE/
BAD DEBTS EXPENSE
XXX RECOVERIES

ENDING BALANCE XXX

NOTES RECEIVABLE
 INTEREST BEARING (with realistic or reasonable interest rate)
- is initially measured at its fair value, which is equal to its face value.
❑ INTEREST BEARING (with unrealistic interest rate)
- discounted using the imputed interest rate that approximates the market
rate of interest for the same note.
❑ NON-INTEREST BEARING (Zero Interest)
- PV of future cash flows using prevailing market rate of interest for similar
receivables.
1. PERIODIC PAYMENTS (w/ available cash price) –
PV of note = Cash Price
2. ONE TIME COLLECTION OF PRINCIPAL (no available cash price) –
PV of note = face value x PV of 1
3. UNIFORM COLLECTION OF PRINCIPAL ANNUALLY (no available cash
price) – PV of note = periodic payment x PV of OA
SUBSEQUENT MEASUREMENT
 INTEREST BEARING W/ REALISTIC INT. RATE
- Face value & any accrued interest
❑ INTEREST BEARING W/ UNREALSITIC INT. RATE
- discounted value using imputed interest rate that
approximates market rate of interest for the same note
❑ NON-INTEREST BEARING
- Note receivable (initial recognition) minus principal
repayment, plus or minus the cumulative amortization of
any difference between the initial carrying amount and
the principal maturity amount minus reduction for
impairment or uncollectibility.
LOANS RECEIVABLE

 Is a financial asset arising from a loan

granted by a bank or other financial
institution to a borrower or client.
INITIAL MEASUREMENT
 Shall measure initially at FAIR VALUE plus
transaction costs (this include DIRECT ORIGINATION
COSTS)
 DIRECT ORIGINATION COSTS should be included
in the initial measurement of the loan receivable.
However, INDIRECT ORIGINATION COSTS should
be treated as OUTRIGHT EXPENSE.
ORIGINATION FEES
 These are fees charged by the bank against
the borrower.
 Include compensation for activities such as

evaluating the borrower’s financial condition,

evaluating guarantees, collateral and other
security, negotiating the terms of the loan,
preparing and processing documents and
closing the loan transaction.
 ORIGINATION FEES RECEIVED FROM BORROWER
are recognized as unearned interest income and
amortized over the term of the loan.
 DIRECT ORIGINATION COSTS are origination fees
that are not chargeable against the borrower and
are deferred and also amortized over the term of
the loan.
 INITIAL CARRYING AMOUNT OF LOAN
Principal Amount XX
Origination fees received (XX)
Direct origination costs XX
INITIAL CARRYING AMOUNT XX
SUBSEQUENT MEASUREMENT
 - Loan receivable (initial recognition) minus
principal repayment, plus or minus the
cumulative amortization of any difference
between the initial carrying amount and the
principal maturity amount minus reduction for
impairment or uncollectibility.
IMPAIRMENT OF LOAN
 The amount of loss is measured as the difference
between the carrying amount of the loan and the
present value of estimated future cash flows
discounted at the original effective rate of the loan.

CARRYING AMOUNT XX
PV OF FUTURE CASH FLOWS (XX)
IMPAIRMENT LOSS (XX)
RECEIVABLE FINANCING

 Is the financial flexibility or capability of

an entity to raise money out of its
receivables.
 When an entity may find itself in tight
cash position due to some circumstance, an
entity may be forced to look for cash by
financing its receivables.
 COMMON FORMS OF RECEIVABLE
FINANCING:
 PLEDGE
 ASSIGNMENT

 FACTORING

 DISCOUNTING
 PLEDGE
 When loans are obtained from the bank or any
lending institution, the accounts receivable may be
pledged as COLLATERAL SECURITY for the
payment of the loan.
 No entry shall be made and only disclosure is
necessary in the notes to FS.
 ALL accounts receivable serves as collateral.
 ASSIGNMENT
 Means that a borrower (assignor) transfers its
rights in some of its accounts receivable to a
lender (assignee) in consideration for a loan.
 It is a more formal type of pledging since a
secured borrowing is evidenced by a financing
agreement and a promissory note both of which the
assignor signs.
 SPECIFIC accounts receivable shall serve as
collateral security for the loan.
FEATURES OF ASSIGNMENT
 NONNOTIFICATION BASIS – customers are not
informed that their accounts have been assigned. As
a result the customers continue to make payments to
the assignor, who in turn remits the collections to the
assignee.
 NOTIFICATION BASIS – customers notified to make
their payments directly to the assignee.
 FACTORING
 Is a sale of accounts receivable on a without
recourse, notification basis.
 An entity actually TRANSFERS OWNERSHIP of

its accounts receivable to the factor. Thus, the

factor assumes responsibility for uncollectible
factored accounts.
FORM OF FACTORING
 CASUAL FACTORING – it is an ordinary sale of asset
where the difference between the sales price and the
book value of the asset sold represent gain or loss.
 FACTORING AS A CONTINUING AGREEMENT – In this
set up, before the merchandise is shipped to a customer,
the selling entity requests the factor’s credit approval.
For compensation, typically the factor charges
commission or factoring fee of 5 to 20% for its services
of credit approval, billing, collecting and assuming
uncollectible factored accounts. The factor may withhold
a predetermined amount as a protection against
customer returns and allowances and other special
adjustment (FACTOR’S HOLDBACK).
 DISCOUNTING
 When a note is negotiable, the payee may
obtain cash before maturity date by
discounting the note at a bank or other
financing company.
 To discount the note, the payee must endorse it.
Thus, legally the payee becomes the endorser
and the bank becomes the endorsee.
 Endorsement may be with recourse which means
that the endorser shall pay the endorsee if the
maker dishonors the note. This is the contingent or
secondary liability of the endorser.
 Endorsement may be without recourse which means
that the endorser avoids future liability even if the
maker refuses to pay the endorsee on the date of
maturity.
 SILENT (WITH RECOURSE)
 NET PROCEEDS = Maturity Value minus
discount
 MATURITY VALUE = Principal plus interest

 PRINCIPAL = Face value (amount appearing

on the face of the not)
 INTEREST = PRINCIPAL x RATE x TIME

 DISCOUNT = MATURITY VALUE x DISC. RATE x

DISC PERIOD (unexpired term)
END