INTERMEDIATE ACCOUNTING 1, PART 2 (AE 14)

LEARNING MATERIAL

UNIT NUMBER / HEADING: CHAPTER 8 – RECEIVABLE FINANCING

INTRODUCTION

IFRS 15 is the new global framework for revenue recognition.

Entities sell products and services in a bundle or multiple deliverables or those
engaged in major projects could see significant change in timing of revenue
recognition.
Entities likely to be affected by this new revenue standard include those engaged in
telecom, software, engineering, construction and real estate.
Revenue is income in the ordinary course of business activities.
Income is increase in economic benefit during the accounting period in the form of
an inflow or enhancement of asset or decrease in liability that results in an increase
in equity, other than contribution from equity participants.
PFRS 15 applies to all contracts with customers, except:
a. Leases under PFRS 16
b. Insurance contracts under PFRS 17
c. Financial instruments under IFRS 9

LEARNING OUTCOMES

At the end of the unit, students will be able to

 Discuss the concept of Receivable Financing
 Enumerate the sources of financing through receivables
 Demonstrate the accounting for pledge of accounts receiavble

ACTIVATING PRIOR LEARNING

1. Briefly explain receivable financing.
2. Enumerate the four common forms of receivable financing.
 3. What is pledge of accounts receivable?

PRESENTATION OF CONTENTS
RECEIVABLE FINANCING
-is the financial flexibility or capability of the company to generate cash out of its receivables.
It is the act of inducing cash inflows from receivables other than from their normal or
scheduled payments.

source: https://www.investopedia.com/terms/a/accountsreceivablefinancing.asp

FORMS OF RECEIVABLE FINANCING

The common forms of receivable financing are:
a. Pledge of accounts receivable
b. Assignment of accounts receivable
c. Factoring of accounts receivable
d. Discounting of accounts receivable

PLEDGING/HYPOTHECATING
-refers to borrowing of money from the bank or any financial institution in which
receivables in general are used as collateral or security for a loan.

NOTE:
In pledging of accounts receivable, there is no transfer of financial asset since the entity
who pledge the accounts receivable retains the control over the pledge receivable. Since
receivables in general are used as collateral, pledging is sometimes called general
assignment.

No complex problems are involved in this form of financing except for the accounting for
the loan. The loan is recorded by debiting cash and discount on note payable if loan is
discounted and crediting note payable. With respect to the pledged accounts, no entry
would be necessary. It is sufficient that the disclosure thereof is made in a note to
financial statement.

ILLUSTRATION: PLEDGING OF ACCOUNTS RECEIVABLE

On October 1, 2021, Blackberry Company borrowed P1,000,000 for one year from Samsung
Bank with a stated interest rate of 12%. As a security for the loan, Blackberry Company
hypothecated its accounts receivable amounting to P1,500,000. Samsung Bank deducted
the one year interest in advance.
Required:
Prepare the entries in relation to the assignment of the accounts receivable, assuming
amortization of interest deducted in advance is to be made equally for the entire loan term.
Solution:
Journal Entries are:
Oct. 1 Cash (P1,000,000 – P120,000) P880,000
Discount on notes payable (P1,000,000 x 12% x 120,000
12/12)
Notes payable-bank P1,000,000

Dec. Interest Expense (P120,000 x 3/12) P30,000

31
Discount on notes payable P30,000

SFP PRESENTATION
SFP – Current Liability P910,000

NOTES TO F/S
Note payable P1,000,000
Less: Discount on Note payable (P120,000-P30,000) 90,000
Carrying Value 910,000

STATEMENT OF COMPREHENSIVE INCOME

Interest Expense P30,000

Only the loan transaction is recorded and the pledging of accounts receivable would only
appear in to the note to financial statements.
A note to FS may appear as follows:
“The note payable to bank matures on October 1, 2022 and is secured by accounts
receivable with face value of P1,500,000.”

RECOGNITION AND MEASUREMENT

Generally, revenue is recognized when the entity has transferred promised goods or
services to the customer. IFRS 15 sets out five steps for the recognition process:
The Five-Step Model:
IFRS 15 provides a guidance about contract combinations and contract
modifications, too.
Contract combination happens when you need to account for two or more contract
as for 1 contract and not separately. IFRS 15 sets the criteria for combined
accounting.
Contract modification is the change in the contract’s scope, price or both. In other
words, when you add certain goods or services, or you provide some additional
discount, you are effectively dealing with the contract modification.
IFRS 15 sets different accounting methods for individual contract modification,
depending on certain conditions.
Revenue recognition over time
Revenue is recognized over time when any of the following is satisfied:
a. The customer simultaneously receives and consumes the benefits provided
by the entity’s performance as the entity performs.
 For example, routine or recurring payroll processing services.

b. The entity’s performance creates or enhances an asset that the customer

controls as the asset is created or enhanced.

For example, constructing an asset on a customer site.

c. The entity’s performance does not create an asset with an alternative use of
the entity and the entity has an enforceable right to receive payment for
performance completed to date.

For example, constructing a specialized asset that only the customer can use
or constructing an asset in accordance with customer order.

Revenue recognition at a point in time

The following factors would indicate revenue recognition at a point in time:
a. The entity has the right to receive payment for the asset and for which the
customer is obliged to pay.
b. The customer has legal title to the asset.
c. The entity has transferred physical possession of the asset to the customer.
d. The customer has the significant risks and rewards of ownership of the asset.
e. The customer has accepted the asset.

Contract costs
IFRS 15 provides a guidance about two types of costs related to the contract:
1. Costs to obtain a contract
Those are the incremental costs to obtain a contract. In other words, these
costs would not have been incurred without an effort to obtain a contract – for
example, legal fees, sales commissions and similar. These costs are not
expensed in profit or loss, but instead, they are recognized as an asset if
they are expected to be recovered (the exception is the contract costs related
to the contracts for less than 12 months).
2. Costs to fulfill a contract. If these costs are within the scope of IAS 2, IAS
16, IAS 38, then you should treat them in line with the appropriate standard. If
not, then you should capitalize them only if certain criteria are met.

COMMON TYPES OF TRANSACTIONS

Warranties
If a customer has the option to purchase a warranty separately from a product to
which it relates, it constitutes a distinct service and is accounted for as a separate
performance obligation. This would apply to a warranty which provides the customer
with a service in addition to the assurance that the product complies with agreed-
upon specifications.

Principal Vs. Agent

Am entity must establish in any transaction whether it is acting as principal or agent.
It is principal if it controls the promised goods or services before it is transferred to
the customer. When the performance obligation is satisfied, the entity recognizes
revenue in the gross amount of the consideration to which it expects to be entitled for
those goods or services.
It is acting as an agent if its performance obligation is to arrange for the provision of
goods or services by another party. Satisfaction of this performance obligation will
give rise to the recognition of revenue in the amount of any fee or commission to
which it expects to be entitled in exchange for arranging for the other party to provide
its goods or services.

Repurchase Agreements
Under a repurchase agreement, an entity sells an asset and promises, or has the
option, to repurchase it. Repurchase agreements generally come in three forms:
a. An entity has an obligation to repurchase the asset (a forward contract).
b. An entity has the right to repurchase the asset (a call option).
c. An entity must repurchase the asset if requested to do so by the customer (a
put option).
In the case of a forward contract or a call option the customer does not obtain control
of the asset, even if it has physical possession. The entity will account for the
contract as:
a. A lease in accordance with IFRS 16, if the repurchase price is below the
original selling price; or
b. A financing arrangement if the repurchase price is equal to or greater than the
original selling price. In this case the entity will recognize both asset and
corresponding liability.

Consignment Arrangement
Consignment is a method of marketing goods in which the entity called the consignor
transfers physical possession of certain goods to a dealer or distributor called
consignee that sells the goods on behalf of the consignor.
When consigned goods are sold by the consignee, a report called account sales is
given to the consignor together with a cash remittance for the amount of sales minus
commission and other expenses chargeable to the consignor.

Bill and Hold Arrangement

Bill and hold arrangement is a contract under which an entity bills a customer for a
product but the entity retains possession of the product.
For example, a customer may request an entity to enter into such contract because
of lack of space for the product or because of delays in the customer’s production
schedule.
Depending on the terms of the contract, revenue shall be recognized when the
customer obtains control or takes title of the product even though the product
remains in an entity’s physical possession.

PRESENTATION
Contracts with customers will be presented in an entity’s statement of financial
position as a contract liability, a contract asset or receivable, depending on the
relationship between the entity’s performance and customer’s payment.
A contract liability is recognized and presented in the statement of financial position
where a customer has paid an amount of consideration prior to the entity performing
by transferring control of the related good or service to the customer.
When the entity has performed but the customer has not yet paid the related
consideration, this will give rise either a contract asset or a receivable. A contract
asset is recognized when the entity’s right to consideration is conditional on
something other than the passage of time, for instance future performance. A
receivable is recognized when the entity’s right to consideration is unconditional
except for the passage of time.
When revenue has been invoiced, a receivable is recognized. Where revenue has
been earned but not invoiced, it is recognized as a contract asset.

DISCLOSURE
The objective is for an entity to disclose sufficient information to enable users of
financial statements to understand the nature, amount, timing, and uncertainty of
revenue and cash flows arising from contracts with customers. The following
amounts should be disclosed unless they have been presented separately in the
financial statements in accordance with other standards:
a. Revenue recognized from contracts with customers, disclosed separately
from other sources of revenue.
b. Any impairment losses recognized on any receivables or contract assets
arising from an entity’s contracts with customers, disclosed separately from
other impairment losses.
c. The opening and closing balances of receivables, contract assets and
contract liabilities from contract with customers.
d. Revenue recognized in the reporting period that was included in the contract
liability balance at the beginning of the period.
e. Revenue recognized in the reporting period from performance obligations
satisfied in previous periods (such as changes in transaction price).

APPLICATION
1. Briefly discuss the 5-step model for revenue recognition.
2. Differentiate revenue recognition at a point in time vs. revenue recognition
over time.
3. Enumerate the common types of transactions where IFRS 15 is applicable.

FEEDBACK
Choose the best answer for each question:
1. Which is within the scope of IFRS 15?
a. Lease
b. Insurance contract
c. Financial instrument
d. All of these are beyond the scope of IFRS 15
2. What is the core principle of PFRS 15?
a. Revenue is recognized when earned
b. Revenue is recognized at a point in time or over time
c. Revenue is recognized when collected
d. Revenue is recognized in a manner that depicts the transfer of good or
service to a customer and the revenue reflects the consideration to which
an entity expects to be entitled.
3. The revenue recognition in accordance with the core principle is applied
following
a. Four-step model
b. Five-step model
c. Three-step model
 d. Any model
4. Which statement is true about a contract?
a. A contract is an arrangement between two or more parties that creates
enforceable rights and obligations
b. Enforceability of the rights and obligations in a contract is a matter of law
c. A contract can be in writing, oral or implied by customary business practice
d. All of these are true
5. A contract with a customer must meet all of the following criteria, except
a. The contract is approved by all parties
b. The rights and obligations of the parties and payment terms are identified
c. The contract has a commercial substance
d. It is not probable that the consideration will be collected
6. A performance obligation is
a. A promise to deliver a distinct good in a contract with a customer
b. A promise to deliver an indistinct good in a contract with a customer
c. The consideration to which an entity is expected to be entitled
d. An executed contract
7. The transaction price
a. Is the amount of consideration in a contract
b. May include variable or a non cash consideration
c. May be affected by the time value of money if the contract contains a
significant arrangement
d. All of these describe a transaction price
8. The transaction price is allocated to the performance obligations based on
relative
a. Stand-alone selling price
b. Fair value
c. Adjusted market price
d. Residual value
9. When shall an entity recognize revenue from contract with a customer
a. When it is probable that the future economic benefits will flow to the entity
b. When or as the entity satisfies the performance obligation by transferring
control of a good or service to a customer
c. When the entity collected the consideration from the customer
d. When the entity and the customer signed the contract
10. Revenue shall be recognized at a point in time under all of the following,
except
a. The customer has legal title to the asset
b. The customer has physical possession of the asset
c. The entity has not transferred the significant risk and reward of ownership
d. The entity has the right to receive payment for the asset
References:

 Valix, C. T., Peralta, J.F & Valix C. A. M. (2020). Conceptual Framework and
Accounting Standards. Manila, Philippines: GIC Enterprises & Co.. Inc.
 Ballada, W., & Ballada S. (2020). Conceptual Framework and Accounting
Standards. Manila, Philippines: DomDane Publishers.
 https://www.ifrsbox.com/ifrs/ifrs-15/
 https://www.ifrsbox.com/ifrs-15-revenue-contracts-customers/