Chapter 2 RECEIVABLE

Learning Objectives

• Identify the proper presentation of receivables as either current or

noncurrent assets.
• State the timing of recognition and measurement of trade receivables.
• Estimate the recoverable historical cost of trade receivables.
• State the initial and subsequent measurements of notes receivable.
• Compute for present value factors and apply them properly.
• Prepare amortization tables.
• Compute for the effective interest rate.
• Explain the accounting for origination costs and fees.
• Account for the impairment of receivables.
• Identify the instances where derecognition of receivable is appropriate.
Trade vs. Non-trade receivables

• Trade receivables are receivables

arising from the sale of goods or services
in the ordinary course of business.
• Receivables arising from other sources
are non-trade receivables.
Financial statement presentation
• Trade receivables are classified as current assets when
they are expected to be realized in cash within the
normal operating cycle or one year, whichever is longer.

• Non-trade receivables are classified as current assets

only when they are expected to be realized in cash within
one year.

• Trade and non-trade receivables that are current assets

are aggregated and presented in the statement of
financial position as “Trade and other receivables.”
Initial Measurement
• Trade receivables that do not have a significant financing
component are measured at the transaction price in accordance
with PFRS 15 Revenue from Contracts with Customers.

• Transaction price is “the amount of consideration to which an

entity expects to be entitled in exchange for transferring promised
goods or services to a customer, excluding amounts collected on
behalf of third parties (e.g., some sales taxes).” (PFRS 15)

• As a practical expedient under PFRS 15, an entity may not discount

a trade receivable if it is due within 1 year.
Recognition

• Trade receivable is recognized when the entity

has right to consideration that is unconditional.
This is normally the case when the control
over the promised goods or services is
transferred to the customer.
FOB Shipping point vs. FOB Destination
• Under FOB shipping point, ownership is transferred
to the buyer upon shipment. Therefore, sales and
accounts receivable are recognized on shipment date.

• Under FOB destination, ownership is transferred only

upon receipt of the goods by the buyer. Therefore, sales
and accounts receivable are recognized only when the
buyer receives delivery of the goods.
Accounting for sales discounts

• Trade discount vs. Cash discount

• Traditional GAAP vs. PFRS 15 treatment
Allowance method of accounting for bad debts
• Direct Method vs Allowance Method
Estimating doubtful accounts
1. Percentage of net credit sales method
2. Percentage of ending receivable method

3. Aging method
Note receivables
• A note receivable is a 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.
Initial measurement

• Receivables are initially recognized at fair value plus

transaction costs that are directly attributable
to the acquisition, except trade receivables.
Summary of Measurements
Type of receivable Initial measurement Subsequent
measurement
1. Short-term Face amount/ Present Recoverable historical
value/ Transaction price cost/Amortized
(for trade receivables) cost/PFRS 15

2. Long-term Face amount Recoverable historical

cost
3. Long-term w/ zero Present value Amortized cost
interest
4. Long-term w/ Present value Amortized cost
unreasonable interest

The fair value of the receivable at initial recognition may be measured in

relation to the cash price equivalent of the noncash asset given up in
exchange for the receivable. In such case, the subsequent measurement of the
receivable is at amortized cost.
Time Value of Money
• FV of ₱1 vs. PV of ₱1
- The FV of ₱1 and PV of ₱1 are opposites.
- The FV of ₱1 answers the question “If I invest ₱100,000 today at
10% interest, how much money do I have in three-years’ time?”
- FV of ₱1 = (1 + i)n = (1 + 10%)3 = 1.331
- Answer: (₱100,000 x 1.331 ) = ₱133,100
or (₱100,000 x 110% x 110% x 110%) = ₱133,100
- The PV of ₱1 answers the question “If I want to have ₱133,100 in
three-years’ time, how much money do I have to invest today (at
10% interest)?
- PV of ₱1 = (1 + i)-n = (1 + 10%)-3 = 0.751315
- Answer: (₱133,100 x 0.751315 ) = ₱100,000
PV of ₱1
• In the second example, the ₱133,100 to be received in 3-years’ time
includes an unspecified principal and unspecified interest. These
elements can only be separated through present value computations.

₱100,000
principal
PV
1₱133,100
computation ₱33,100
unearned interest
Therefore, assuming the ₱133,100 is a receivable, it should be recorded
today only at ₱100,000 (the present value) because the ₱33,100 is
unearned interest. The interest will be recorded only when it is earned,
i.e., through passage of time.
Time value of money (continuation)
• PV of ₱1 is used when the cash flow is lump sum or when cash flows
are non-uniform. PV of ₱1 = (1 + i)-n

• PV of ordinary annuity ₱1 is used when the cash flows are in

installments and the first installment does not begin
immediately.

• PV of an annuity due of ₱1 is used when the cash flows are in

installments and the first installment begins immediately.
Effective Interest Method

• PV of ₱1 amortization table
Effective Interest Method

• PV of annuity amortization table

Loan receivables
• Receivables are initially recognized at fair value plus
transaction costs that are directly attributable to the
acquisition, except trade receivables.
 Direct origination costs are added to the carrying
amount of a loan receivable. Indirect origination costs
are expensed when incurred.
 Origination fees are deducted from the carrying
amount of a loan receivable.
Impairment
Impairment
• The expected credit loss model (ECL)
Definition of terms

• Loss allowance – is the allowance for expected credit losses on financial assets
that are within the scope of the impairment requirements of PFRS 9.
 
• Expected credit losses – is the weighted average of credit losses with the
respective risks of a default occurring as the weights.

• Credit loss – is the difference between all contractual cash flows that are due to
an entity in accordance with the contract and all the cash flows that the entity
expects to receive (i.e., all cash shortfalls), discounted at the original effective
interest rate (or credit-adjusted effective interest rate for purchased or originated
credit-impaired financial assets).
Definition of terms

• 12-month expected credit losses – The portion of lifetime expected

credit losses that represent the expected credit losses that result from
default events on a financial instrument that are possible within the 12
months after the reporting date.
• Credit risk – The risk that one party to a financial instrument will cause
a financial loss for the other party by failing to discharge an obligation.
• Lifetime expected credit losses – The expected credit losses that
result from all possible default events over the expected life of a financial
instrument.
General approach
Simplified approach

• An entity shall always measure the loss allowance at amount

equal to lifetime expected credit losses for its trade receivables or
contract assets that do not contain a significant financing
component.
Derecognition of receivables

• Financial assets are derecognized when:

a) the contractual rights to the cash flows from the financial asset
expire; or
b) the financial assets are transferred and the transfer qualifies for
derecognition.

• Derecognition (of a financial instrument) means the removal of a

previously recognized financial asset or financial liability from an
entity’s statement of financial position.
Evaluation of transfers of receivables
• If control over the receivable is:
a) Substantially transferred, the receivable is derecognized.
b) Substantially retained, the receivable is not derecognized but continued
to be recognized. Any cash received from the transfer is recognized as
liability.
c) Partially transferred and partially retained, the portion transferred is
derecognized while the portion retained is continued to be recognized.
Offsetting of financial assets and financial
liabilities
• A financial asset and a financial liability shall be offset and the net
amount presented in the statement of financial position only when
both of the following conditions are met:
a. The entity currently has a legally enforceable right to set off the
recognized amounts; and
b. The entity intends either to settle on a net basis, or to realize the
asset and settle the liability simultaneously.
Receivable financing
1. Pledge (hypothecation)
Receivable financing
1. Pledge (hypothecation)
2. Assignment
a. Notification basis
b. Non-notification basis
3. Factoring
4. Discounting of notes receivable
 NP = MV – D
 MV = P + i
 D = MV x Dr x Dp
 Dr = Discount rate
 Dp = Discount period (the unexpired term of the note)
 Interest income = interest accrued on the expired term of the note
Receivable financing
1. Pledge (hypothecation)
2. Assignment
a. Notification basis
b. Non-notification basis
3. Factoring
4. Discounting of notes receivable
 NP = MV – D
 MV = P + i
 D = MV x Dr x Dp
 Dr = Discount rate
 Dp = Discount period (the unexpired term of the note)
 Interest income = interest accrued on the expired term of the note