Accounting for RECEIVABLES ODM

DEFINITIONS
RECEIVABLE is an entity’s right to consideration that is unconditional. (IFRS 15)

ACCOUNTS RECEIVABLE are open accounts, not supported by promissory notes, which represent claims by
the company in exchange of goods and/or services provided.

NOTES RECEIVABLE are open accounts, supported by formal promises to pay in the form of promissory
notes, that represent claims by the company in exchange of goods and/or services
provided.

LOANS RECEIVABLE are receivables arising from loans extended by financial institutions.

TRADE RECEIVABLES are receivables arising from sale of goods and/or services in the ordinary course
of business.

NONTRADE RECEIVABLES1 are receivables arising from sources other than from sale of goods or services in
the normal course of business.

GENERAL RULE FOR RECOGNITION, MEASUREMENT, AND DISCLOSURE

An item of receivable is a financial asset that represents a contractual right to receive cash or another financial asset
from another entity. It is also important to note that it should be probable that the item is collectible.
Receivables shall be measured initially at fair value2 plus transaction costs3.
NOTES AND LOANS RECEIVABLE
Measurement: ACCOUNTS RECEIVABLE
Short-term Long-term
Initial TRANSACTION PRICE FACE VALUE DISCOUNTED VALUE
(The original invoice amount) (The amount written on the note) (Using the prevailing market rate)

Subsequent NET REALIZABLE VALUE AMORTIZED COST5

(Gross amount minus allowances4) (Using the effective interest method)
Note: Generally, the valuation of receivables should be at present value as of reporting date.

Receivables are presented on the face of the balance sheet, depending on its classification (Current or Non-current),
as one-line item labeled as “Trade and other receivables” with the details disclosed in the notes to financial
statements.
The receivable is classified as current asset if collectible within;
TRADE RECEIVABLE One year or normal operating cycle whichever is longer.
NONTRADE RECEIVABLE One year.

ACCOUNTS RECEIVABLE
ACCOUNTS RECEIVABLE (TRADE)
BEGINNING BALANCE ENDING BALANCE
SALES ON ACCOUNT COLLECTIONS
RECOVERIES OF PREVIOUS WRITE-OFFS SALES DISCOUNTS
Included in the analysis
SALES RETURNS (ACTUAL)
only if amount of Excluding refunded
collections includes the
WRITE-OFFS
returns by customers.
said recovery.
×××× = ××××

1 Examples of Nontrade Receivables are: advances to; shareholders, employees, affiliates, suppliers; subscription receivable, creditors’ debit
balances, special deposits, accrued income such as accruals for; dividends, rent, royalties, interest; and claims such as claims for; losses or
damages, rebates, refunds, and insurance.
2 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date.
3 Transaction Costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability. An
incremental cost is one that would not have been incurred if the entity had not acquired, issued or disposed of the financial instrument.
4 Allowances include allowance for: freight charges, sales returns, sales discounts, allowance for doubtful accounts, and allowance for any
impairment losses.
5 Amortized Cost is the amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus
or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount
and, for financial assets, adjusted for any loss allowance.

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 ACCOUNTING FOR BAD DEBTS (DOUBTFUL ACCOUNTS)
ALLOWANCE METHOD DIRECT WRITE OFF METHOD
This method requires recognition of a bad This method requires recognition of a
debt loss if accounts are doubtful of bad debt loss only when the accounts
<- Short description ->
collection. are proven to be worthless or
uncollectible.
During the year:

Allowance for doubtful accounts xxx <- Upon write off -> Bad debt expense xxx
(The customer account has been
Accounts receivable xxx proved to be uncollectible)
Accounts receivable xxx

Accounts receivable xxx Accounts receivable xxx

Allowance for doubtful accounts xxx <- Upon recovery -> Bad debt expense xxx
(Collection of account previously
Cash xxx written off) Cash xxx
Accounts receivable xxx Accounts receivable xxx

At year end:
Bad debt expense xxx
<- Required adjustment -> None
Allowance for doubtful accounts xxx

Analysis:
Yes <- Satisfies Matching -> No
ALLOWANCE METHOD: APPROACHES IN ESTIMATING BAD DEBTS
BALANCE SHEET APPROACH
Percent of Receivables -Allowance for doubtful accounts (ADA) is estimated as a percent of receivables.
Aging of Receivables -Allowance for doubtful accounts (ADA) is estimated according to ages of customer accounts.
INCOME STATEMENT APPROACH
Percent of Sales -Bad debt expense is estimated as a percent of sales.
If the policy is based on percentage or
aging of receivables, we get first the
ALLOWANCE FOR DOUBTFUL ACCOUNTS (ADA) amount of ADA then squeeze for bad
• ENDING BALANCE • BEGINNING BALANCE debt expense. This is related to ending
If the policy is based on percentage or balance of accounts receivable last year.
aging of receivables, we get first the
• WRITE-OFFS • RECOVERIES OF
amount of ADA then squeeze for bad
debt expense. This is related to ending
PREVIOUS WRITE-OFFS
balance of accounts receivable this year.
If the policy is based on percentage
• BAD DEBTS (AMOUNT OF
of Sales, we get first the amount of
YEAR-END ADJUSTMENT)
bad debt expense for the year then
squeeze for ADA. This is related to
×××× = ×××× Sales amount this year.

NOTES AND LOANS RECEIVABLE

Discounting
PRESENT VALUE (₱) FUTURE VALUE (₱)

DISCOUNT ON NOTE (₱)

(Implied Interest)
Discounting or present value computation will depend on the cash-flow pattern as follows:
WITH ONE TIME / LUMP SUM
WITH PERIODIC CASH FLOWS
CASH FLOW
PRESENT VALUE FACTOR OF PRESENT VALUE FACTOR OF
Factor PRESENT VALUE FACTOR OF ₱1 ORDINARY ANNUITY OF ₱1 ANNUITY DUE OF ₱1 (ADVANCE)
(First payment is one period away from today) (First payment is today)
𝟏 − (𝟏 + 𝒊)−𝒕 𝟏−(𝟏+𝒊)−𝒕
Formula 𝑷𝑽𝑭 𝒐𝒇 ₱𝟏 = (𝟏 + 𝒊)−𝒕 𝑷𝑽𝑭 𝒐𝒇 𝑶𝑨 𝒐𝒇 ₱𝟏 = 𝑷𝑽𝑭 𝒐𝒇 𝑨𝑫 𝒐𝒇 ₱𝟏 = (𝟏 + 𝒊)
𝒊 𝒊

Hint 0 < FACTOR < 1 t > FACTOR > 1

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ANALOGIES (DEPN)
✓ There is a discount if the effective rate (AKA: yield rate) is greater than the nominal rate (AKA: agreed, stated, coupon
rate). With discount, the proceeds or cash flow on the transaction date (the present value) is less than the face of the
note/loan. Interest income will be increased by the amount of discount amortization.
✓ There is a premium if the nominal rate is greater than the effective rate. With premium, the proceeds or cash flow
on the transaction date is greater than the face of the note/loan. Interest income will be decreased by the amount
of premium amortization.
INTEREST-BEARING VS NONINTEREST-BEARING NOTES
A promissory note with stated interest agreed by parties into the contract.
INTEREST-BEARING NOTE Face value is the effective present value of the note.
Maturity value is equal to face amount of the note plus accrued interest.
A promissory note with no stated interest agreed by parties into the contract.
NONINTEREST-BEARING NOTE Face value is the maturity value of the note.
Present value is equal to face amount less implied interest on the note.
Note: The implied interest on a noninterest-bearing note is the discount or unearned interest which is the difference between the face amount and
present value of future cash flows discounted at the prevailing rate of the transaction. Short-term noninterest-bearing promissory note may
not be discounted because the effect of discounting is immaterial.

IMPAIRMENT OF RECEIVABLES
A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash
flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired include observable data about
the following events: (IFRS 9, Appendix A)
- significant financial difficulty of the issuer or the borrower;
- a breach of contract, such as a default or past due event;
- the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty,
having granted to the borrower a concession(s) that the lender(s) would not otherwise consider;
- it is becoming probable that the borrower will enter bankruptcy or other financial reorganization;
- the disappearance of an active market for that financial asset because of financial difficulties; or
- the purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses.
CREDIT LOSS (IMPAIRMENT LOSS)
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). (IFRS 9, Appendix A)

RECEIVABLE FINANCING (P.D.A.F.)

TYPE OF TRANSACTION
General accounting treatment
BORROWING SALE
PLEDGE (General Assignment) ✓ Receivable is not derecognized
DISCOUNTING of note receivables ✓ Receivable is derecognized
ASSIGNMENT (More formal pledging) ✓ Receivable is not derecognized
FACTORING of account receivables ✓ Receivable is derecognized
GENERAL RULE IN COMPUTING GAIN OR LOSS
Gain or Loss = Consideration received less Carrying value of the asset sold
Note: If it is determined that the risks and rewards associated to the asset (the receivable) are not transferred to the buyer, as in the case of sale of
receivables with recourse, such transactions will be treated as “borrowing” and no gain or loss will be recognized.

The expectations of life depend upon diligence;

T h e m e c h a n i c t h a t w o u l d p e r f e c t h i s w o r k m u s t fi r s t s h a r p e n h i s t o o l s .
- C o n f u c iu s

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