MFRS 139

RECEIVABLE

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LEARNING OUTCOMES
1. Define and explain types of trade receivables
2. Explain the benefits and costs of offering credit
facilities to customers
3. Explain the purpose of aging analysis and credit limits
4. Explain the accounting treatment on initial
measurement
5. Explain the accounting treatment on subsequent
measurement (impairment of TR)
6. Estimate the impairment loss allowance using
provision matrix
7. Describe the derecognition criteria of TR
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8. Explain the Note Receivable- recognising & valuing the
notes
9. Prepare the disclosure requirement of TR (AFITR and
net realisable of receivable)

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Receivables = financial instrument
( financial asset)
= (monetary contract between parties)

MFRS 132 – a financial assets is

A contractual right to receive cash or another financial asset from
another entity

- FA shall be recognised in SOFP when entity becomes a

parti to the financial instrument contract
***
Contract - agreement between 2 parties that has clear
Economica consequences

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Non-financial asset :
� Physical assets - as property, plant and equipment, inventory,
leased assets and intangible assets
⚫ Control of physical assets creates an opportunity to generate a cash
inflow but does not give rise to a present contractual right to receive
cash or another financial asset, therefore do not qualify as financial
assets.
� Prepaid expenses
⚫ are not financial assets as they do not give rise to a contractual right to
receive cash or another financial asset.
⚫ Pre-paid expenses are contractual rights to receive goods or services
(for example insurance cover for a future period in time).

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6
DEFINITION OF RECEIVABLE
�Are amounts for which sales were made but the
consideration in return for that sale was not yet paid
by the customer
�Are claims that are expected to be collected in cash
from customer
� MFRS 132: Entity’s claim to the future collection of
cash or services.
�Represent one of a company’s liquid assets
⚫ important factor to determine an entity’s (short-term)
liquidity.

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� Receivable can be classified into:
⚫ Account receivable
� amounts owed by customers that result from the sale of
goods or services
⚫ Note receivable
⚫Claims for which a written promise (formal instruments)
of credit are issued as proof of debt
⚫are a written promise (as evidenced by a formal
instruction) for amounts to be received; resulted from
sales of goods /lending money

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⚫ Other receivable
�Include non-trade receivable (eg interest
receivable, loan to company officers, advances to
employees, income tax refundable)
�Not resulted from normal the operation of business

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� Receivable are a form of debt with fixed or determinable
payment
⚫ Not quoted in an active market (not held for trading)
⚫ Not have a fixed maturity date
⚫ If they do have a fixed maturity date, management need not
have the intention to hold them to maturity
� They arise when the entity provides money, goods or
services to the debtor with no intention of trading the
receivable

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OBJECTIVES OF PROVIDING INFORMATION ON
RECEIVABLE

� Receivable discloses in the financial position of the company is based on

the ability of the entity to collects its economic resources and the future net
cash inflow of the entity.

� By having such information:

⚫ Assess efficiency and liquidity in managing receivables.
⚫ It also can be used as a management tool in determining the customer’s
credit risk.
� If an accounts receivable demonstrates that a company's receivables
are being collected much slower than normal, this is a warning sign
that business may be slowing down or that the company is taking
greater credit risk in its sales practices.
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SIZE OF RECEIVABLES AFFECTED BY:

1. Industry 2. Nature of business

3. Level of sales made 4. Credit process

5. Whether it extends 6. Time of year

Long term financing

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THE BENEFITS OF OFFERING CREDIT
FACILITIES TO CUSTOMERS
� Increase in Sales
⚫ If other entities in the market are not offering credit terms, the
entity will gain sales by offering credit terms, as the
customers will buy from us instead of having to pay cash.
� Better Customer Loyalty
⚫ Offering credit to customers indicates that entity have respect
and trust them to pay their bills before their due dates. In
return, the customers will reward these gestures of confidence
by continuing to buy from the entity forming better customer
loyalty within the businesses.

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� Meet the Competition
⚫ When other entities are offering credit, then the entity need to
do the same to stay competitive. In addition, by offering the
discounts to customers, entity is offering more favourable
terms then other entities in the market.
� 

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THE COSTS OF OFFERING CREDIT
FACILITIES TO CUSTOMERS.
� Additional administration costs
⚫ Credit worthiness of each customers must be
investigated which requires checking the customers’
credit references and obtaining a business report.
� Loss of opportunity as cash is tied up with debtors.
⚫ Cash flow will be immediately affected especially
when there is late payment or uncollectible cases.
This may impact the funding required for any growth
plans.
�
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� Keeping up with accounts receivables
⚫ Entity need to keep up with the status of its account
receivables and establish efficient reminder system to
deal with overdue accounts.
� Late payments result in reduce cash flow
⚫ Huge issues as it may put entity at risk resulting in
entity needing to increase their own borrowing to
finance their operation.
� Potential of bad debts
⚫ There will always be a risk when offering credit of
having a bad debt regardless of entity may have
already check the customer’s credit rating and
references.
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MANAGING RECEIVABLES
� Since uncollectible (irrecoverable) debts can severely
decrease profits (financial loss), it is important for
entities to reduce the incidence of uncollectible by
managing their receivables efficiently i.e. good credit
control
� 2 tools may be considered.
(1) Setting a credit limit
⚫ Credit limit is the maximum amount that an entity is willing
to risk in an account. This is a threshold that an entity will
allow its customers to owe at any time without having to go
back and review their credit limit.
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(2) Credit monitoring through preparing aging
report of trade receivables (aging analysis)
⚫The report provides details of amounts outstanding and due to
entity by its customers. It helps to identify customers that are
falling behind on their payments indicating their possible
financial problems.

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BENEFITS OF ACCOUNTS RECEIVABLE
AGING REPORTS
� Provides a tool that help to determine the financial health
of the company
� Used as a tool to determine the customer’s credit risk
� Provide information about how efficient company in
collecting cash from AR
� Provide information about the incidence of uncollectible
of AR that lead to greater credit risk will be exercised

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RECOGNITION OF TRADE RECEIVABLES – MFRS 139
� MFRS 139 requires
⚫ Entity shall recognize a financial asset in SOFP when, and
only when, the entity becomes a party to the contractual
provisions of the instrument.

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**Receivables are recognised when and only when
- The entity becomes a party to the contract, and has a legal right
to receive cash

**‘Contract’ refer to an agreement between two or more parties may

take a variety of forms and need not be in writing
DIFFERENCES BETWEEN TRADE AND
CASH DISCOUNTS
Trade discount
A deduction from the quoted price.
Offer to customer with bulk
purchases (quantity of purchase)
Usually expressed in percentage of
the quoted price.
• Customer will be invoiced
for NET of the trade
discount.
Cash discount
A deduction in amount owed by the
customer (gross amount of normal
period)
Offer to encourage customers to
make quick payment (early
payment) of to pay within a certain
period of time.
Shown as deduction from sales
account in the SOPL.
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� There are 2 dates on which the financial instruments can
be recognised (or derecognised)
⚫ Trade date – is the date the entity commits itself to purchase
or sell an asset

⚫ Settlement date – is the date when the asset is delivered to or

by the entity

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EXAMPLE 1
JC Ltd sold goods on account to Polo Company for RM1,000,
term 2/10, n/30

Does this transaction give rise to financial asset?

Solution:
Yes, this transaction give rise to financial asset because credit sales
transaction between JC Ltd and its customer create contractual right for
the company to receive cash (financial asset) as a payment from Polo
company Therefore, JC Ltd shall recognised its trade receivable .

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MEASUREMENT – INITIAL
� an entity shall measure a financial asset at its fair value
plus transaction costs that are directly attributable to the
acquisition the financial asset.
⚫ Receivable should be valued at fair value
⚫ The fair value of a receivable on initial recognition is
normally the transaction price (ie the invoice price less any
trade discount given)

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EXAMPLE 2
Nona Sdn Bhd is business selling furniture in Terengganu.
On 5 March 2013 Laila has make an order worth
RM50,000. The company decides to give 10% trade
discount to Laila. On 6 March 2013, Nona Sdn Bhd
delivers the furniture to Laila.
Required :
i. Do the transactions on 5 March or 6 March give rise to
financial asset for Nona Sdn Bhd?
ii. Explain the amount of receivables to be recognised in
the books of Nona Sdn Bhd.
iii. Show the journal entries to record the receivable.

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Solution;
i. Yes, the transaction on 6 March give rise to financial
asset because credit sales transaction between Nona Sdn
Bhd and Laila (customer) create contractual right for
Nona to receive cash (financial asset) as a payment from
its customer. Therefore, Nona Sdn Bhd should
recognised the trade receivable on 6 March.

The transaction on 5 March does not create any

financial asset or financial liability because Nona Sdn
Bhd only has the right to deliver the furnitures and
Laila has a right to receive it.

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ii. The amount of receivables to be recognised is a total
list price less trade discount i.e 50,000 – (10%x
50,000) = 45,000

iii. Journal entries

Dr Receivable 45,000
Cr Sales 45,000

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�A sales order signed by both parties involved is not
recognised as an asset by the buyer or a liability by
the seller at the time of committing the order.

�The asset is not recognised until the ordered goods or

services are actually shipped, delivered or rendered to
the reporting entity.

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SUBSEQUENT MEASUREMENT
� MFRS139 specifies that after initial recognition (subsequent
measurement)
⚫ an entity shall measure a financial asset at either fair value or at
amortised cost

� The main concern as regards to the outstanding trade receivables:

whether the stated amount can be realised (collected) eventually.
⚫ Risks associated with receivables:
�The goods sold are broken after purchase and therefore customer
may not be able to obtain future economic benefits from the
goods.
�When customers are unable to pay the amount due (uncollectible),
thus creating financial loss to the company.
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� If loans and receivables are measured at amortised cost,
it shall be measured at acquisition cost less impairment
(loss due to decrease in value).
� Impairment of financial asset:
⚫ If an entity expects its customer will pay a bit later
than agreed, an impairment loss on the trade
receivable need to be recognise.
�Bad debt provision = Allowance for Impairment of Trade
Receivable (AFITR)
⚫ Increase in loss allowance = SOPL (exp)

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Example 3 Dream Motor

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� 2 methods used in estimating the allowance for impairment of
trade receivable
(1) Percentage of sales
�Based on the past experience and anticipated credit
policy, management estimates what percentage of credit
sales will be uncollectible
�Entity applies the percentage to either total credit sales
or net credit sales of the current year.

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(2) Percentage of receivables
�The entity prepare ageing schedule of receivable in
which it classifies customer balances by the unpaid
period, determines the expected bad debt losses and
apply different percentage to the total in each category
�Another method is by applying certain percentage of
uncollectible on the net receivables at the end of the year

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� Example 4 JIM BHD

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� MFRS 9 requires entities to estimate and account for
Expected Credit Loss (ECL) for all relevant financial
assets (mostly debt securities, receivables including lease
receivables, contract assets under MFRS 15, loans)
starting from when they first acquire a financial asset.

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EXPECTED CREDIT LOSS (ECL)
� There are 2 approaches:
(1)General approach (not covered in FAR210)
⚫ This model recognised loss allowances depending on the
stage (3 stages) of a financial asset. The impairment loss is
either:
�In the amount of a 12-month ECL or
�A lifetime expected ECL
(2)Simplified approach
⚫ No need to determine the stage of a financial asset, as
impairment (loss allowance) is recognised always at
LIFETIME ECL.
**Trade receivables & contract assets under MFRS 15 36
WITHOUT significant financing approach
HOW TO APPLY SIMPLIFIED
APPROACH?
� Using PROVISION MIX – calculation of impairment loss
based on the default rate percentage applied to the group of
financial assets.

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� Computation of default rate – the percentages are based
on the historical experience (historical default rate) and
adjusted it, where necessary for forward- looking
estimates.

**
� Historical default rate – analyse the historical credit loss,
select appropriate periods (recommended 1 or 2 years),
select the time period s when receivables were paid and
calculate default rate for each period.
� Forward looking information – all information that could
affect the credit losses in the future for example
macroeconomics forecasts of unemployment, housing
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prices, etc.
� 
� Example 5 JK Bhd

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DE-RECOGNITION OF TRADE RECEIVABLES.

• An entity shall derecognise 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 contractual rights to receive the

cash flows of the financial asset.
⚫An example - factoring agreement, under which an entity
transfers the right to collect its trade debtors to another entity.

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� ** the contractual right to cash flow from the financial
asset is considered expire when:
⚫ The AR has been settle in full
⚫ The AR has been declared bankrupt, so no cash can be
collected, the amount due is written off as bad debt

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On derecognition of a financial asset in its entirety, the difference
between:
(a) the carrying amount (measured at the date of
derecognition) and,
(b) the consideration received (including any new asset
obtained less any new liability assumed) shall be
recognised in profit or loss.

Dr Cash XX
Dr Discount allowed/SOPL XX
Cr Receivables XX

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� Example 6 Dream Motors

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DE-RECOGNITION OF TRADE RECEIVABLES -
FACTORING

• Factoring is a sale of receivable to a factor. A

factor is usually a bank or a finance company.
• The bank usually charges a commission or
discount on the net amount of receivable
purchased.
• A receivable transferred to another organization would
only be derecognized when control is surrendered (i.e.
when bank will bear the risk of uncollected and obtain
the rewards from the collection)

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� Example 7 Bahagia Bhd

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DISCLOSURE OF RECEIVABLES (MRFS 7)
MFRS 7 requires a reconciliation of what is
disclosed to the items presented

In SOFP - receivable are shown at their net

realizable value as follows:
Accounts Receivable (gross) XXX
less: AFITR (XX)
Net Realizable Value XX

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47
 Norhayati Zamri _Jun-Oct 2016
NOTES RECEIVABLE

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MFRS139: Receivables
DEFINITION
� Written promise (as evidenced by a formal instrument;
e.g. promissory note) for amounts to be received at a
definite time.

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� Give the holder a stronger legal claim to assets than do
account receivable.
� Can be readily sold to another party.
� Require from customers who need to extend the payment
of an outstanding account receivable.

Norhayati Zamri
_Jun-Oct 2016
ILLUSTRATION: PROMISSORY NOTE

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Norhayati Zamri
_Jun-Oct 2016
MAIN CRITERIA OF NOTES
RECEIVABLES (DIFFERENT FROM AR)
⚫ It’s a WRITTEN promise notes.
⚫ It charged interest per annum.
⚫ It has maturity due date at specified period in the
future.
⚫ It is negotiable instrument.

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COMPUTING INTEREST
� Interest rate is an annual rate of interest.

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Face value of note x Annual Interest rate x Time in terms of one year

Terms of Note Interest computation

Face value x Rate x Time = Interest

RM730, 12%, 120 days RM730 x 12 % x 120/360 = RM29.20

RM1,000, 9%, 6 months RM1,000 x 9% x 6/12 = RM45

Norhayati Zamri
_Jun-Oct 2016
RECOGNITION OF NR
� The company records the note receivable at its face
value, the amount shown on the face of the note.

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� Same with Account receivable (AR) Promissory notes
may be used
⚫ Credit sales of goods and services
Dr: Notes receivables
Cr: Sales
⚫ when individuals and companies lend or borrow money.
Dr: Notes receivables
Cr: Cash/Bank

Norhayati Zamri
_Jun-Oct 2016
� To record acceptance of customer note
Dr Notes Receivable
Cr Account Receivable

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MEASUREMENT OF (VALUING) NR
� 2 types:
⚫ Short term NR – within 1 year (cover in FAR210 syllabus)
⚫ Long term NR – more than 1 year; measured at present
value of cash expected to be collected (not covered).

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� Same with Account receivables (AR) - measured at the
TRANSACTION PRICE (FACE VALUE) and consider
impairment loss if an entity expects its customer will pay a bit
later than agreed.
⚫ NR is measured at Net realisable of receivables (Face
value Less loss allowances (AFITR)
� 
DETERMINE THE VALUE OF NR
⚫ Computation of maturity value.
�Months or days
�When counting days, omit the date the note is issued, but include
the due date.

⚫ Computation of interest
�Apportion interest by 360 days a year.
�Value of NR = Face value x Interest % x time in terms of 1 year
� 

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DERECOGNITON (DISPOSING) OF
NOTES.
� Notes may be held to their maturity date (face value &
accrued interest is due)

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⚫ Honor of notes receivable
⚫ Dishonor of notes receivable
⚫ Discounting of notes receivable

Norhayati Zamri
_Jun-Oct 2016
HONOR OF NOTES RECEIVABLE

� when fully paid at its maturity date

� Amount due at maturity – the face value + interest

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� Illustration
ACCRUAL OF INTEREST RECEIVABLE
�

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DISHONOR OF NOTES RECEIVABLE

� Note that is not paid in full at maturity date

� No longer negotiable
� Payee still has a claim against the maker for both of the note

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and interest.
� Transfer Notes Receivable account to Account Receivable.

⚫If there is no hope for collection, the amount of face value would
write off by debiting Allowance for impairment.
⚫No interest revenue would be recorded because collection will not
occur.
DISCOUNTING OF NOTES RECEIVABLE
� Discounting - Holder speeds up conversion to cash by
selling the note receivable.
� The bank deducts the interest or discount from the
maturity value of the note to determine the proceeds.
� The maturity value is the principal of the note plus
interest from the date of the note until the due date.

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TUTORIAL
DEC 2019 Q3
JUN 2019 Q3
JUN 2018 Q3
JAN 2018 Q3

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