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BA 114.1

Receivables

[IAS 32 par 11]

A financial asset is any asset that is:

a. Cash;
b. An equity instrument of another entity;
c. A contractual right:
i. To receive cash or another financial asset from another entity; or
ii. To exchange financial assets or financial liabilities with another entity
under conditions that are potentially favourable to the entity; or
d. A contract that will or may be settled in the entity’s own equity instruments.

Definition
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[IAS 32 par 13]

‘Contract’ or ‘contractual’ refer to an agreement between

two or more parties that has clear economic consequences
that the parties have little discretion to avoid because
usually the agreement is enforceable by law.
Contracts may take a variety of forms and need not be in
writing.

Definition
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[IAS 32 par 11 and 13]

Based on the definition of financial asset and contractual rights,

loans and receivables are considered financial assets.

IAS 32 Application Guidance 4 enumerates common financial

instruments that give rise to financial assets representing a
contractual right to receive cash in the future: (a) trade accounts
receivable; (b) notes receivable; (c) loans receivable; and (d) bonds
receivable.

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Classification of Receivables
Current Receivables Non-Current Receivables
- Expected to be collected within 12 - All other receivables
months or operating cycle,
whichever is longer
Accounts Receivable Notes Receivable
- Oral promises from customers - Written promises from customers;
usually with interest
Trade Receivables Non-Trade Receivables
- Claims arising from normal business - Claims arising from various
operations (sales of goods &/or transactions
services)
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• Advances to officers and employees as well as to subsidiaries;

• Deposits to cover potential damages or losses or to guarantee
performance or payment (rent, contract bids etc.);
• Claims against insurance companies for casualties sustained;
defendants under suit; government agencies for tax refund,
common carriers for damaged or lost goods, creditors for returned,
damaged or lost goods; and customers for returnable items
(crates, containers, etc);
• Dividends and interest receivable;
• Sale of securities or property other than inventory.

Examples of Non-Trade
Receivables 6

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Receivables Non-Trade Receivables

IAS 1.66.
a. it expects to realize the asset, or intends to sell or
Trade Receivables consume it, in its normal operating cycle;
Receivable from customers b. it holds the asset primarily for the purpose of
trading;
c. it expects to realize the asset within twelve months
Accounts Notes after the reporting period; or
Receivable Receivable d. the asset is cash or a cash equivalent (as defined in
IAS 7) unless the asset is restricted from being
exchanged or used to settle a liability for at least
twelve months after the reporting period.

Kinds of Receivables
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[IFRS 9 par 3.1.1]

An entity shall recognize a financial asset in its statement of

financial position when, and only when, the entity becomes
party to the contractual provisions of the instruments.

Read also paragraphs B3.1.1 and B3.1.2

Recognition of
Receivables 8

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[IFRS 9 par 4.1.1]

Unless paragraph 4.1.5 applies, an entity shall classify

financial assets as subsequently measured at
a) Amortized cost;
b) FVTOCI; or
c) FVTPL
On the basis of both the entity’s business model for
managing financial assets and the contractual cash flow
characteristics of the financial assets.

Classification of
Receivables 9

[IFRS 9 par 4.1.5]

An entity may, at initial recognition, irrevocably designate a

financial asset as measured at FVTPL if doing so eliminates
or significantly reduces a measurement or recognition
inconsistency (accounting mismatch) that would otherwise
arise from measuring assets [or liabilities] or recognizing
gains or losses on them on different bases.

Classification of
Receivables 10

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[IFRS 9 par 4.1.1]

Receivables Amortized Cost

4.1.5 4.1.1 FVTOCI

Fair Value Option Business Model

FVTPL

Classification of
Receivables 11

[IFRS 9 par 4.1.2]

A financial asset shall be measured at amortized cost if both of the

following conditions are met:
a. The financial asset is held within a business model whose objective is
to hold financial assets in order to collect contractual cash flows; and
b. The contractual terms of the financial asset give rise on specified dates
to cash flows that are solely payments of principal and interest on the
principal amount outstanding.

Also read B4.1.2C to B4.1.4, specifically Examples 1 & 4

Classification of
Receivables 12

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[IFRS 9 par 5.1.3]

At initial recognition, an entity shall measure trade receivables at

their transaction price, especially if trade receivables do not contain a
significant financing component.

Transaction price is the amount of consideration that an entity

expects to receive from a customer in exchange for goods or services
sold (B5.1.1). This is simply the face value or the original invoice
amount.

Measurement of
Receivables 13

[IFRS 9 par 5.2.2 and 5.5.1]

An entity shall apply the impairment requirements in Section

5.5 to financial assets that are measured at amortized cost
and FVTOCI.

Also read B5.5.1 to B5.5.6

Subsequent Measurement
of Financial Assets 14

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[IFRS 9 par 5.5.15]

Simplified Approach
An entity always measure the loss allowance at an amount equal to
the lifetime ECL for:
a. Trade receivables (that do not contain a significant financing
component) – simplified approach only;
b. Trade receivables (that contain a significant financing
component) and lease receivables– can choose the general or
simplified approach.

Impairment:
Recognition of ECL 15

[IFRS 9 Appendix A]
Lifetime ECL is defined as the expected credit losses that result from all
possible default events over the expected life of a financial instrument.
[IFRS 9 par. 5.5.17]
ECL should reflect:
a) An unbiased and probability-weighted amount;
b) The time value of money; and
c) Reasonable and supportable information that is available without undue
cost or effort at the reporting date.

Impairment:
Recognition of ECL 16

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Past/Historical events

ECL Model Current conditions

Forecast of future
Generally, all financial assets carry economic conditions
a loss allowance.
No trigger event is required for
recognizing impairment. IFRS 9 par. 5.5.17 (c)

New Impairment
Model 17

Notes in exchange for cash:

• When a note is exchanged for cash and no other rights or

privileges are involved, the present value of the note is
presumed to be the amount of the cash proceeds.
• Note is recorded at face amount and any difference between the
face amount and the cash proceeds is recorded as a premium or
discount on the note.
• Any unamortized premium or discount on notes is reported on the
balance sheet as a direct addition to or deduction from the face
amount of the note, showing the NPV.

Normal Situation
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Notes in exchange for property, goods or services:

• There is general presumption that the interest specified by the
parties to the transaction represents fair and adequate
compensation for the use of borrowed funds.
• Valuation problems arise when:
 No interest is stated;
 Stated rate does not seem reasonable given the nature of the
transactions and surrounding circumstances;
 Stated face amount of note ≠ current cash equivalent sales price
of similar property, goods or services or from the current market
value of similar notes at the date of the transaction.

Special Valuation
Problems 19

[IFRS 9 par B5.1.1]

The FV of a long-term loan or receivable that carries

no interest can be measured as the PV of all future
cash receipts discounted using the prevailing market
rate(s) of interest for similar instrument with a similar
credit rating.

Measurement of Note
Receivables 20

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How should notes in exchange for property, goods or services

be measured?
The note should be recorded at:
a. The fair value of the property, goods or services exchanged;
or
b. The fair value of the note,

whichever is more clearly determinable.

Special Valuation
Problems 21

[IFRS 9 par B5.1.2A]

If the transaction price is different from the FV at

initial recognition, then the difference should be
deferred after initial recognition as a gain or loss only
to the extent that it arises from a change in a factor
that market participants would take into account
when pricing the asset.

Measurement of
Receivables 22

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[IFRS 9 par 5.4.1]

Interest revenue shall be calculated by using the effective interest method.

Interest Revenue = effective interest rate x gross carrying amount

[IFRS 9 par 5.4.4; also B5.4.9]

An entity shall directly reduce the gross carrying amount of a financial

asset when the entity has no reasonable expectations of recovering a
financial asset in its entirety or a portion thereof.

Amortized Cost
Measurement 23

[IAS 21 par. 8]

Closing rate is the spot exchange rate at the end of the

reporting period.
Spot exchange rate is the exchange rate for immediate
delivery.
Monetary items are units of currency held and assets and
liabilities to be received or paid in a fixed or determinable
number of units of currency. (Also par. 16)

Foreign Currency Denominated

Sales & Receivables 24

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[IAS 21 par. 20]

A foreign currency transaction is a transaction that is denominated
or requires settlement in a foreign currency, including transactions
arising when an entity:
a) Buys or sells goods or services whose price is denominated in a
foreign currency;
b) Borrows or lends funds when the amounts payable or
receivable are denominated in a foreign currency; or
c) Otherwise acquires or disposes of assets, or incurs or settles
liabilities, denominated in a foreign currency.

Foreign Currency Denominated

Sales & Receivables 25

[IAS 21 par. 21]

A foreign currency transaction shall be recorded, on initial
recognition in the functional currency, by applying to the foreign
currency amount the spot exchange rate between the functional
currency and the foreign currency at the date of the transaction.

[IAS 21 par. 8]
Functional currency is the currency of the primary economic
environment in which the entity operates.

Foreign Currency Denominated

Sales & Receivables 26

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[IAS 21 par. 21]

A foreign currency transaction shall be recorded, on initial
recognition in the functional currency, by applying to the foreign
currency amount the spot exchange rate between the functional
currency and the foreign currency at the date of the transaction.

[IAS 21 par. 22]

Date of transaction is the date on which the transaction first
qualifies for recognition.

Foreign Currency Denominated

Sales & Receivables 27

[IAS 21 par. 23]

At the end of each reporting period:
a) Foreign currency monetary items shall be translated using the
closing rate;
b) Non-monetary items that are measured in terms of historical
cost in a foreign currency shall be translated using the
exchange rate at the date of the transaction; and
c) Non-monetary items that are measured at fair value in a
foreign currency shall be translated using the exchange rates at
the date when the fair value was measured.

Foreign Currency Denominated

Sales & Receivables 28

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[IAS 21 par. 28]

Exchange differences arising on the settlement of monetary items

or on translating monetary items at rates different from those at
which they were translated on initial recognition during the period
or in previous financial statements shall be recognized in profit or
loss in the period in which they arise, except as described in
paragraph 32. (par. 32 is not yet relevant in BA 114.1)

Foreign Currency Denominated

Sales & Receivables 29

[IAS 21 par. 29]

When the transaction is settled within the same accounting period

as that in which it occurred, all the exchange difference is
recognized in that period.

However, when the transaction is settled in a subsequent

accounting period, the exchange difference recognized in each
period up to the date of settlement is determined by the change in
exchange rates during each period.

Foreign Currency Denominated

Sales & Receivables 30

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If a company chooses the fair value option,

• Receivables are recorded at fair value at each reporting
date; and
• Reports any change in fair value as an unrealized holding
gain or loss in the profit or loss.

Classification of
Receivables 31

Current Assets
• Trade Receivables (collectible within 1 year or normal
operating cycle, whichever is longer).
• Non-trade Receivables (collectible within 1 year)
Less: Allowance for Doubtful Accounts
Net Realizable Value (NRV)

Non-Current Assets
Non-trade Receivables (at amortized cost; collectible
beyond 1 year)

Balance Sheet Presentation

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[IFRS 9 par 5.7.1 and 5.7.2]

A gain or loss on a financial asset that is measured at

• FVTPL shall be recognized in profit or loss…
• Amortized cost and is not part of a hedging relationship shall be
recognized in profit or loss when the financial asset is
derecognized, reclassified in accordance with paragraph 5.6.2,
through the amortization process or in order to recognize
impairment gains or losses.

Gains or Losses
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Many companies transfer their receivables for various reasons:

a. To accelerate the receipt of cash;
b. To avoid entering short-term borrowing agreements to satisfy
immediate cash requirement;
c. To avoid violating existing lending agreements; and
d. To avoid the hassles of billing and collection.

Kinds of transfer:
a. Secured borrowing – where receivables are used as collaterals;
and
b. Sale of receivables – where receivables are sold for cash.

Receivables as a Source of
Cash 34

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[IFRS 9 par 3.2.3]

An entity shall derecognize a financial asset when, and only when:
a. The contractual rights to the cash flows from the financial asset
expire; or
b. It transfers the financial asset and substantially all the risks and
rewards of ownership; or
c. It transfers the financial asset and retained some substantial risks
and rewards of ownership but the transferee has the right to
pledge or sell the financial asset.

It is helpful to refer to B3.2.1 flowchart.

Derecognition
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[IFRS 9 par 3.2.4]

An entity transfer a financial asset if, and only if, it either:

a. Transfers the contractual rights to receive the cash flows of
the financial asset; or
b. Retains the contractual rights to receive the cash flows of the
financial asset, but assumes a contractual obligation to pay
the cash flows to one or more recipients in an arrangement
that meets the conditions in par 3.2.5.

Transfer of Financial Asset

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[IFRS 9 par 3.2.5]

When an entity retains the contractual rights to receive the cash flows of the financial
asset (original asset), but assumes a contractual obligation to pay the cash flows to one
or more entities (eventual recipients), the entity treats the transaction as a transfer of a
financial asset if, and only if, all of the following three conditions are met.
a. The entity has no obligation to pay amounts to the eventual recipients unless it
collects equivalent amounts from the original asset.
b. The entity is prohibited by the terms of the transfer contract from selling or pledging
the original asset other than as security to the eventual recipients for the obligation
to pay them cash flows.
c. The entity has an obligation to remit any cash flows it collects on behalf of the
eventual recipients without material delay. In addition, the entity is not entitled to
reinvest such cash flows…

Transfer of Financial Asset

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[IFRS 9 par 3.2.6; also B3.2.4 (a) and B3.2.5 (e)]

When an entity transfers a financial asset, it shall evaluate the extent

to which it retains the risks and rewards of ownership of the financial
asset.
No
Substantially transfer all the risks
Continue to recognize the
and rewards of ownership of the
financial asset
financial asset ?

Yes Yes

Derecognize the financial asset &

Retain control of the financial
separately recognize assets for
asset ?
any rights created or retained No

Transfer of Financial Asset

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[IFRS 9 par 3.2.9; also B3.2.7 & B3.2.8]

Whether the entity has retained control of the transferred asset

depends on the transferee’s ability to sell the asset.

[IFRS 9 par 3.2.12]

On derecognition of a financial asset in its entirety, the difference

between:
a. The carrying amount; and
b. The consideration received
Shall be recognized in profit or loss.

Transfer of Financial Asset

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Disposition of Accounts and Notes Receivables:

1. Why are receivables sold or transferred?
2. How are receivables transferred to third parties?
a. Sale of receivables
i. Sale with recourse
ii. Sale without recourse
b. Secured borrowing (assignment/pledging of
receivables)

Practical Application
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Sale without recourse or factoring

Seller of the receivable assumes no responsibility for any credit
losses associated with the transferred receivable.
Seller of the Receivable Buyer of the Receivable
Dr. Cash (proceeds) Dr. Accounts/Notes Receivable
Dr. Due from Factor (retention %) Cr. Due to Customer
Dr. Loss on Sale of Receivable Cr. Interest Income
Cr. Accounts/Notes Receivable (Face Cr. Cash
Value)

Practical Application
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Sale with recourse

Seller of the receivable guarantees payment to the purchaser in
the event the debtor fails to pay.
Seller of the Receivable Buyer of the Receivable
Dr. Cash (proceeds) Dr. Accounts/Notes Receivable
Dr. Due from Factor (retention %) Cr. Due to Customer
Dr. Loss on Sale of Receivable Cr. Interest Income
Cr. Accounts/Notes Receivable (Face Cr. Cash
Value)
Cr. Recourse Liability

Practical Application
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Secured borrowing (pledging or assignment)

Uses receivable as collateral in a borrowing transaction. If the
loan is not paid when due, the creditor can convert the collateral
to cash.
Seller of the Receivable Buyer of the Receivable
Dr. Cash (proceeds) Dr. Notes Receivable
Dr. Interest Expense Cr. Interest Revenue
Cr. Note Receivable (face value) Cr. Cash

Usually interest is deducted in advance.

Practical Application
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[IFRS 9 par 3.2.15]

If a transfer does not result in derecognition…, the entity shall

continue to recognize the transferred asset in its entirety and shall
recognize a financial liability for the consideration received. In
subsequent periods, the entity shall recognize any income on the
transferred asset and any expense incurred on the financial liability.

Is offsetting of asset and associated liability allowed?

Can income arising from transferred asset be offset with any expense
incurred on the associated liability?

Transfer of Financial Asset

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[IFRS 9 par 3.2.23]

If a transferor provides non-cash collateral to the transferee, the

accounting for the collateral by the transferor and the transferee
depends on whether the transferee has the right to sell or re-pledge
the collateral and on whether the transferor has defaulted.

Transfer of Financial Asset

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