(Intermediate Accounting 1A)

LECTURE AID

2019

ZEUS VERNON B. MILLAN

Chapter 6 RECEIVABLES –
ADDITIONAL CONCEPTS
Learning Objectives

• Explain the accounting for origination

costs and fees.
• Account for the impairment of
receivables.
• Identify the instances where
derecognition of receivable is
appropriate.

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Loans receivable
• Receivables are initially recognized at fair value plus
transaction costs.
 Direct origination costs are added to the carrying
amount of a loan receivable. Indirect origination costs
are expensed when incurred.
 Origination fees are deducted from the carrying
amount of a loan receivable.

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Impairment

• The expected credit loss model (ECL)

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General approach

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Definition of terms

• Loss allowance – is the allowance for expected credit losses on financial assets
that are within the scope of the impairment requirements of PFRS 9.
 
• Expected credit losses – is the weighted average of credit losses with the
respective risks of a default occurring as the weights.

• Credit loss – is the difference between all contractual cash flows that are due to
an entity in accordance with the contract and all the cash flows that the entity
expects to receive (i.e., all cash shortfalls), discounted at the original effective
interest rate (or credit-adjusted effective interest rate for purchased or originated
credit-impaired financial assets).

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Definition of terms

• 12-month expected credit losses – The portion of lifetime expected

credit losses that represent the expected credit losses that result from
default events on a financial instrument that are possible within the 12
months after the reporting date.
• Credit risk – The risk that one party to a financial instrument will cause
a financial loss for the other party by failing to discharge an obligation.
• Lifetime expected credit losses – The expected credit losses that
result from all possible default events over the expected life of a financial
instrument.

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Simplified approach

• An entity shall always measure the loss allowance at amount

equal to lifetime expected credit losses for its trade receivables or
contract assets that do not contain a significant financing
component.

• Examples: Provision matrix and Single loss rate

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Derecognition of receivables

• Financial assets are derecognized when:

a) the contractual rights to the cash flows from the financial asset
expire; or
b) the financial assets are transferred and the transfer qualifies for
derecognition.

• Derecognition (of a financial instrument) means the removal of a

previously recognized financial asset or financial liability from an
entity’s statement of financial position.

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Evaluation of transfers of receivables
• If control over the receivable is:
a) Substantially transferred, the receivable is derecognized.
b) Substantially retained, the receivable is not derecognized but continued
to be recognized. Any cash received from the transfer is recognized as
liability.
c) Partially transferred and partially retained, the portion transferred is
derecognized while the portion retained is continued to be recognized.

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Offsetting of financial assets and financial
liabilities
• A financial asset and a financial liability shall be offset and the net
amount presented in the statement of financial position only when
both of the following conditions are met:
a. The entity currently has a legally enforceable right to set off the
recognized amounts; and
b. The entity intends either to settle on a net basis, or to realize the
asset and settle the liability simultaneously.

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Receivable financing
1. Pledge (hypothecation)
2. Assignment
a. Notification basis
b. Non-notification basis
3. Factoring
4. Discounting of notes receivable
 NP = MV – D
 MV = P + i
 D = MV x Dr x Dp
 Dr = Discount rate
 Dp = Discount period (the unexpired term of the note)
 Interest income = interest accrued on the expired term of the note
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 APPLICATION OF CONCEPTS
 

PROBLEM 2: FOR CLASSROOM DISCUSSION

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 OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

INTERMEDIATE ACCTG 1A (by: MILLAN)

 END
INTERMEDIATE ACCTG 1A (by: MILLAN)