Receivables

Types of Receivables
 Trade or Accounts Receivables- refers to claims arising from sale of goods and services in the
ordinary course of business.
 Notes Receivable- refers to claims supported by formal promises to pay in the form of notes.
 Loan Receivable- refers to claims arising from a loan granted by financial institutions to a client.
 Non-trade Receivable- refers to claims arising other than sale of goods or services.
Classification
 Current Assets- collectible within 1 year.
 Non-current Assets- collectible beyond more than a year.
Costumer Credit Balances- the costumers has paid more than they receive.
Initial Measurement
PFRS 9, paragraph 5.1.1 provides that a financial asset shall be recognized initially at fair value
plus transaction cost that are directly attributable to the acquisition.
Short-term Investment- measured at face amount.
Accounts Receivable- measured at face amount.

Subsequent Measurement
In accordance with PFRS 9, paragraph 5.2.1 after initial recognition accounts receivable shall be
measured at amortized cost (net realizable value).
Net Realizable Value- the amount of receivables that has been reduced by adjustments in the ordinary course of business.

Following deductions on estimating net realizable value.

 Allowance for freight charge
 Allowance for sale returns
 Allowance for sale discount
 Allowance for doubtful accounts
Methods of Recording
 Gross Method- record at gross amount, discount is not applied.
 Net Method- record at net amount, discount is recognized.
Bad Debts- refers to accounts receivable that will not be collected or worthless.
Methods in estimating bad debts
 Allowance Method
 Direct Write Off
Allowance Method- the allowance for doubtful accounts serve as a deduction from accounts receivable.
GAAP requires the use of allowance method because it conforms to the matching principle and accounts
receivable can be measured properly at net realizable value.
Write off Uncollectible Accounts- the said accounts receivable is worthless so you have to debit
allowance to decrease allowance and credit accounts receivable to decrease receivable.
Recoveries of Accounts Written off – if the said worthless account is recovered just simply record cash
to debit and accounts receivable credit.
The generally accepted approach is to simply reverse the original entry of write off regardless
whether the recovery is during the year of write off or not.
Direct Write off Method- the accounts receivable is proved to be worthless so simply debit bad debt
expense and credit accounts receivable. If the accounts are doubtful of collection no adjustment is needed.
BIR recognizes only this method for income tax purpose.

The direct write off method is not permitted by under IFRS.

Doubtful accounts in the Income Statement

 Distribution cost- account are under the charge of sales manager.
 Administrative expense- accounts are under charge other than the sales manager.
Methods in estimating Doubtful Accounts
 Balance Sheet Approach
 Income Statement Approach
Balance Sheet Approach- based on prior years, the company estimates allowances by rate or percentage
of loss experience by the entity. Companies also use the aging process.
Aging the accounts receivable- involves an analysis where the accounts are classified into not due or
past due.
Allowance is determined by multiplying the total of each classification by rate or percentage of loss of the
entity.
Remember that if you use the balance sheet approach you are calculating a balance sheet number.

Income Statement Approach- based on prior years, the amount of sales for the year is multiplied by a
certain percentage or rate to get the doubtful account expense.
The rate is computed by dividing the bad debt losses in prior years by the change sales of prior years.
Remember that if you use the income statement approach you are calculating income statement number.
Notes Receivable- is an asset of a company bank or other organization that holds written promissory note.
Dis-honored notes –when a written promissory note matures and it is not paid. Dis-honored notes are
transferred to accounts receivable includes face amount, interest, and other charges.
Types of Notes
Interest Bearing Notes Receivable- interest rate is quoted and interest is paid on the due date along with
the principal amount. Also called as non-discounted notes receivable.
Non-interest Bearing Notes Receivable- interest rate is not specified but the total interest amount is
deducted on advance. Also called as discounted notes.
Initial Measurement
Initially measured at present value.
However short-term notes receivable shall be measured at face value.

Subsequent Measurement
Long-term notes receivable shall be measured at amortized cost using the effective interest method. The
amortized cost is in accordance with PFRS 9, paragraph 5.2.1.
Amortized cost can be measured
a) Minus principal payment.
b) Plus or minus cumulative amortization of any difference between the initial carrying amount and the
principal maturity amount.
c) Minus reduction for impairment or uncollectibility.
Loan Receivable- a financial asset arising loan granted by financial institution to a borrower.
Initial Measurement
Measure at fair value plus transaction cost that are directly attributable to the acquisition.
Subsequent Measurement
PFRS 9, paragraph 4.1.2 provides that if the business model in managing financial asset to collect
contractual cash flows as specified dates and the asset shall be measured at amortized cost using
the effective interest method.
Organization Fees- charged by the bank against the borrower for creation of loan.
Direct organization fees received and the direct organization cost are included in the measurement of the loan receivable.

Impairment of Loan
PFRS 9, paragraph 5.5.1 provides that an entity shall recognize a loss allowance for expected credit
losses on financial asset measured at amortized cost.
Paragraph 5.5.3 provides that 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 present value of all cash shortfalls.
Expected credit losses are an estimate of credit losses over the life of the financial instrument.
Measurement of Impairment
In measuring expected credit losses the business should consider
a) The probability waited outcome.
b) The time value of money.
c) Reasonable and supportable information that is available without undue cost or effort.
PFRS 9 does not prescribe particular method of measuring expected credit losses.
The amount of impairment loss can be measured as the difference between the carrying amount and the
present value of estimated future cash flows discounted at the original effective rate.
Three- stage Impairment Approach
Stage 1- This stage cover debt instruments that have not declined significantly in credit quality
since initial recognition or that have low credit risk. Under this scenario, a 12 month expected credit loss is
recognized.
Stage 2- This stage covers debt instruments that have declined significantly in credit quality since initial
recognition but do not have objective evidence of impairment. Under this scenario, a lifetime expected
credit losses is recognized.
There is a rebuttable presumption that there is a significant increase in credit risk if the contractual payments are more than 30
days past due.

Stage 3- this stage covers debt instruments that have objective evidence of impairment at the reporting
date. Under this scenario, a lifetime expected credit loss is recognized.
12 month expected credit loss
A 12 month expected credit loss is defined as the portion of the lifetime expected credit loss from default
events that are possible within 12 months after the reporting period.
Lifetime expected credit loss
Lifetime expected credit loss is defined as the expected credit loss that results from all default events over
the expected life of the instrument.
Lifetime expected credit loss shall always be recognized through aging, percentage of accounts receivable
and percentage of sales.
Interest Income
a) Under stage 1 and 2, interest income is computed based on the gross carrying amount or
face amount.
b) Under stage 3, interest income is computed based on the net carrying amount which is
equal to the gross carrying amount or face amount minus allowance for credit loss.
Receivable Financing- is a financial flexibility or capability of an entity to raise money out of its receivable.
Forms of Receivable Financing
 Factoring of accounts receivable
 Assignment of accounts receivable
 Pledge of accounts receivable
 Discounting of notes receivable
Factoring of accounts receivable
a) Transfer to factor-in a factoring, the transferor (original creditor) transfer the receivables to a factor
(transferee, a financial institution) immediately as normal part of business. The transferor prefers to
pay a fee in return for the factor’s administration of the receivables. The factor often performs credit
checks and collects the payments.
b) Factoring without recourse-this type of factoring is usually accounted for as a sale because the
factor has no recourse against the transferor if there is a default on the receivables. The factor
(transferee) bears the cost of uncollectible accounts, but the seller (transferor) bears the cost of
sales adjustments such a sales discounts and returns and allowances because they are
considered preconditions.
c) Factoring with recourse-when receivables are factored with recourse, the three criteria of Condition
860-40 must be used to determine if the transaction is accounted for as a sale or a loan. The seller
(transferor) bears the cost of bad debts as well as the cost of sales adjustments.
Assignment of accounts receivable
When accounts receivable are assigned, the borrower assigns rights to specific accounts receivable
as collateral for a loan. The lender has the right to seek payment from these receivables should the borrower
(original creditor for the accounts receivable) default on the loan. The borrower reclassifies the receivable as
accounts received assigned, a subcategory of total accounts receivable. The borrower maintains the
receivable records, and as cash is received, it is remitted to the lender in payment of the loan. The loan and
the receivable are not offset on the borrower’s balance sheet. When the loan is repaid, any remaining
accounts receivable assigned are returned to ordinary accounts receivable.
Pledging of accounts receivable
Pledging of accounts receivable is less formal than assignment. Rights to specific receivable noted as
collateral, and accounts receivable are not reclassified. Neither the accounting for the receivables nor the
loan is affected by the pledge. Receivable in bulk are transferred to a trustee and can be used for payment
of the loan in the event of default by the borrower (original creditor for the accounts receivable). The cash
flows from the receivables are used to pay the loan. Footnote disclosure of the pledge is required.

Discounting of notes receivable- 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.
Endorsement- is the transfer of right to a negotiable instrument by simply signing at the back of the
instrument.
 Endorsement maybe with recourse which means that the endorser shall pay the endorsee if the
maker dis-honors the note.
 Endorsement maybe without recourse which means that the 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. Net proceeds refer to discounted value of the note received by the endorser from the endorsee.
Net Proceeds= Maturity value minus Discount
2. Maturity value is the amount due on the note at the date of maturity. Principal plus interest equals
the maturity value.
3. Maturity date is the date on which the note should be paid.
4. Principal is the amount appearing on the face of the note. It is also referred to as face value.
5. Interest is the amount of interest for the full term of the note. Interest is computed as Principal x rate
x time.
6. Interest rate is the rate appearing on the face of the note.
7. Time is the period within which interest shall accrue. For discounting purposes, it is the period from
the date of note to maturity date.
8. Discount is the amount interest deducted by the bank in advance. Discount is equal to maturity value
times discount rate times discount period.
9. Discount rate used by the bank in computing the discount. The discount rate should not be confused
with the interest rate. The discount rate and interest rate are different from each other.
10. Discount period is the period of time from date of discounting to maturity date.