CHAPTER 5

NOTES RECEIVABLES

Learning Objectives:
 State the initial and subsequent measurements of N/R;
 Compute present value factors and apply them properly
 Prepare amortization table
 Compute effective interest rates

Definition of Notes Receivables

- Claim supported by a formal promise to pay a certain sum of money at a specific future
date usually in the form of a promissory note.
- It is a negotiable promissory note meaning, unconditional promise in writing made by
one person to another person , signed by the maker engaging to pay on demand or at a
fixed determinable future time a sum certain in money to order or bearer.
- They are classify either as interest bearing or non-interest bearing note

Interest Bearing Notes

- Have stated interest rate (interest rate in the face of the promisorry note).
- Nominal rate, coupon rate, face rate

Non-interest bearing note

- Do not have interest rate stated in the face of the note contract.
- Included in the face of the note amount is the interest element
- It represents unspecified principal and unspecified interest
- Present value is needed to separate the principal and the interest element

Trade and Non-Trade Notes Receivables

1. Trade Notes Receivables – frequently accept note receivables from customers who need
to extend the payment period of an outstanding account receivable. These are notes
obtain from the sale of goods or services in the ordinary course of business.
2. Non-trade Receivables – from other sources are considered as non-trade (i.e., loans to
employees, sale of PPE on credit).

Classification
1. Short-term receivables
2. Long-term receivables (interest bearing)
3. Long-term receivables (non-interest bearing)
4. Long-term receivables (unreasonable/below market rate interest)

Initial Measurement and Subsequent Measurement

Fair value + Transaction cost, and fair value is equal to:

1. Short Term Receivables

- Recorded at Face amount / Subsequent – recoverable historical cost
- Whether interest bearing or non-interest bearing, recorded at face value
- If with significant financing component, present value / Subsequent – amortized cost
PFRS 15 Exception: Trade receivables without significant financing component are
recorded at Transaction Price and may not be discounted if due within 1 year

2. Long-term Receivables
- With interest stated rate , recorded at face amount / Subsequent is recoverable
historical cost
- Without interest stated rate, recorded at present value of the future cash flows from
the receivables discounted using an imputed interest rate (effective interest rate, market
rate, yield rate) / Subsequent is amortized cost
- With unreasonable interest rate (below the market rate), recorded at present value of
the future cash flows from the receivables discounted using an imputed interest rate /
Subsequent is amortized cost

Note: when the cash price equivalent of the non-cash asset given up in exchange for the
receivable is determinable, the FV of the receivable is equal to the cash price equivalent,
except when practical expedient allowed by PFRS 15 is applicable.

Time Value Concept

1. Future Value – If I deposit P1 today, how much would it be 5 years from now (future
withdrawal)
2. Present value – how much should I deposit today to receive P1 in 5 years (deposit
today)

Time Value of money Factor Application

Present value of P1
Present value of ordinary annuity of P1
Present value of an annuity due of P1
Future cash flow is in lump sum
Future cash flow are installments; 1st
installment is not made immediately
Future cash flow are installments, 1st
installment is made in advance

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