TOPIC 6

Receivables
LEARNING OUTCOMES

At the end of this topic, students should be able

to:
1. Explain the objective of providing information
on receivables
2. Define and recognise receivables
3. Measure receivables
4. Illustrate the presentation of receivables
 INTRODUCTION
 Asset: a present economic resource controlled by the entity as a
result of past events
 An entity shall classify an asset as current when:
(a) it expects to realise the asset or intends to sell or consume it in
its normal operating cycle;
(b) it holds the asset primarily for the purpose of trading;
(c) it expects to realise the asset within twelve months after the
reporting period or
(d) the asset is cash or a cash equivalent (as defined in MFRS 107)
unless the asset is restricted from being exchanged or used to
settle a liability for at least twelve months after the reporting
period.
INTRODUCTION
 INTRODUCTION TO RECEIVABLES
1. Definition of Receivables:
 Amounts due to a company for goods sold or services provided but not yet paid for by the customer.
 Classified as financial assets on the financial position.
2. Role in Business Operations:
 Represent credit extended to customers, reflecting sales that have occurred but not yet been paid in cash.
 Essential for businesses that operate on credit terms.
3. Impact on Cash Flow:
 Indicate future cash inflows, which are crucial in managing working capital and liquidity.
 Critical for short-term financial planning and operational funding.
4. Importance under MFRS:
 MFRS mandates accurate recognition, measurement, and reporting of receivables to ensure transparency and
comparability in financial statements.
 Involves adhering to specific standards like MFRS 9 for financial instruments and MFRS 15 for revenue recognition.
 CHARACTERISTICS OF RECEIVABLES

1. Current Asset: Receivables are typically classified as current assets on the financial position, as
they are expected to be converted into cash within a short period (usually within one year).
2. Risk of Non-payment: There is always a risk that the customer might delay payment or default
entirely. Therefore, companies often perform credit checks and set credit limits to manage this
risk.
3. Interest and Terms: Some receivables may include interest if the payment terms extend over a
longer period. The terms also include conditions like early payment discounts or late payment
penalties.
4. Collectibility: Companies regularly assess the collectibility of their receivables and may write
off those deemed uncollectible as bad debts, impacting the profit or loss.
 TYPES OF RECEIVABLES
1. Trade Receivables: Arising from sales of goods or services.
Example: A furniture company, HomeStyle Furnishings, sells a set of sofas to a customer on credit. The customer agrees to pay
RM2,000 within 30 days. HomeStyle Furnishings records this amount as a trade receivable arises directly from their primary
business activity of selling furniture.
2. Non-Trade Receivables: Arising from other than sales transactions (e.g., loans to employees).
Example: XYZ Corporation provides a short-term loan of RM5,000 to an employee for personal use, to be repaid over 12
months through payroll deductions. This loan is recorded as a non-trade receivable as it is not related to the company's
primary operations of selling products or services.
3. Contract Assets: Recognised under MFRS 15 when a company has fulfilled a performance obligation but has yet to invoice the
customer.
Example: BrightLight Energy, a solar panel installation company, enters into a contract to install solar panels for a client. The
contract states that BrightLight will be paid upon completion of the installation and passing a quality inspection. By the end of
the quarter, BrightLight completes the installation, but the inspection and invoicing are scheduled for the next month. At this
point, BrightLight recognises a contract asset for the revenue earned from the installation.
4. Financial Receivables: These are amounts lent to other entities with an expectation of repayment. They could be long-term or
short-term loans, bonds held, or other forms of financing provided to third parties. Under MFRS, these are initially recognised
at fair value and subsequently measured at amortised cost or fair value, depending on their classification under MFRS 9.
 INITIAL RECOGNITION OF RECEIVABLES
1. Criteria for Recognition:
 When to Recognise: Recognise when the entity becomes a party to the contractual rights to receive cash or another financial
asset.
 Legal Enforcement: The right to receive payment must be legally enforceable.
 Performance: Recognition occurs when the company has performed its obligation, e.g., delivered goods or services.
2. Measurement at Fair Value:
 Initial Measurement: Initially measured at fair value, typically the transaction price.
 Inclusive of Transaction Costs: Includes directly attributable transaction costs (e.g., legal fees, processing costs).
 Fair Value Determination: Fair value equals the invoice amount, as there's usually no significant financing component.
3. Examples of Initial Recognition:
A tech company, TechNova, sells software worth RM50,000 to a client with 30-day payment terms.
 Accounting Entry on Sale Date:
Debit: Accounts Receivable RM50,000
Credit: Revenue RM50,000
Rationale: TechNova recognises a receivable of RM50,000, reflecting its right to receive payment for the software provided. The
amount is recognised at its fair value, which is the invoiced amount.
 EXAMPLE:
Focus Eye Bhd is a company selling Solution:
eyewear products. In January, Focus Eye 1. Yes, it is current assets,
agrees to sell goods on credit to a
customer, Mr X. The products sold are: • it expects to consume in the normal
• 10 units of Elegant eyewear @ RM500 operating cycle;
per unit. • the asset primarily from trading;
• 20 units of Smart eyewear @ RM300 per • it expects to realise the asset within
unit.
twelve months
• Focus Eye gives a credit term of 30
days to Mr X for the debt settlement. 2. Yes, it is receivables when,

Questions: • Focus Eye becomes a party to the

contractual rights to receive cash.
1. Are the goods sold to Mr X current
assets? • the right to receive payment is
2. Are the assets sold considered items legally enforceable.
of receivables? • Focus has performed its obligation
by delivering the eyewear.
 SIMPLE CASE: INITIAL RECOGNITION AND MEASUREMENT OF RECEIVABLES

• Company: Deluxe • Initial Recognition:

Furnishings, a furniture The receivable is recognised when the dining set is delivered to the
retailer. customer, as Deluxe Furnishings has fulfilled its performance obligation.
• Transaction: Deluxe • Measurement at Fair Value:
Furnishings sells a custom Fair Value Determination: The fair value of the receivable is generally
dining set to a customer on the transaction price. However, since the sale is made under a
March 15, 2023, for promotional discount, the fair value needs to be assessed carefully.
RM8,000 on 60-day credit Consideration of Market Price: The normal selling price of the dining
terms. set is RM10,000, but the transaction price is RM8,000. Suppose the
discount is given as part of a promotional offer and not due to financing
• Issue: The dining set was elements or credit terms. In that case, the initial measurement of the
sold at a promotional price; receivable is at the transaction price of RM8,000.
its usual selling price is
• Journal Entry on March 15, 2023:
RM10,000. The reduced
price was offered to attract Debit: Accounts Receivable RM8,000
new customers. Credit: Sales Revenue RM8,000
 EXAMPLE OF CREDIT SALE AND SUBSEQUENT PAYMENT

Credit Sale Transaction:

• Company: Elegant Apparel, a clothing Receipt of Payment:
retailer. • Payment Date: May 16, 2023.
• Date of Sale: April 1, 2023. • Payment Details: Boutique Chic pays the full
• Transaction Details: Elegant Apparel sells amount of RM12,000.
merchandise to Boutique Chic on a 45-day
credit term. The sale amount is RM12,000. • Journal Entry at Payment (May 16, 2023):

• Journal Entry at Sale (April 1, 2023): Debit: Cash RM12,000

Debit: Accounts Receivable RM12,000 Credit: Accounts Receivable RM12,000
Credit: Sales Revenue RM12,000 • Explanation: The receipt of cash is recorded,
• Explanation: Elegant Apparel recognises a and the accounts receivable balance is cleared,
receivable and revenue, reflecting the credit reflecting the completion of the transaction.
terms of the sale.
 TRADE AND CASH DISCOUNTS IN RECEIVABLES
Trade Discounts: Cash Discounts:
 Definition: A reduction in the listed  Definition: An incentive offered by a seller to
price of goods or services at the time a buyer for paying an invoice ahead of the
of sale. Typically offered to encourage scheduled due date. Aimed at encouraging
bulk purchases or to maintain long- early payment and improving cash flow.
term business relationships.
 Accounting Treatment: Sales and receivables
 Accounting Treatment: Not recorded
in the accounting books. Sales and are initially recorded at the gross amount. If
receivables are recorded at the net the discount is taken, the discount amount is
amount (after the trade discount). recorded as a reduction in revenue.
 Example: Elegant Apparel offers a 10%  Example: Elegant Apparel offers a 2% cash
trade discount on orders over discount if payment is made within 10 days.
RM1,000. For an order worth RM1,200, On an RM1,000 sale, if the customer pays
the net sale (and receivable) is within 10 days, the cash discount is RM20, and
recorded at RM1,080 (RM1,200 -
RM120). the revenue is ultimately recorded at RM980
(RM1,000 - RM20).
 RECEIVABLE WITH DISCOUNT
Transaction Overview: 1. Initial Sale (June 1, 2023):
• Journal Entry:
• Company: Gourmet Debit: Accounts Receivable RM5,000
Delights, a specialty food Credit: Sales Revenue RM5,000
supplier. Explanation: The sale is recorded at the gross amount. The potential
cash discount has not been recorded yet.
• Sale Date: June 1, 2023. 2. Early Payment (June 10, 2023):
• Transaction Details: • Payment Details: The restaurant pays the invoice within 15 days, availing
of the 5% discount.
Gourmet Delights sells
• Discount Calculation: 5% of RM5,000 = RM250.
products worth RM5,000 to Journal Entries:
a restaurant on a 30-day Debit: Cash RM4,750 (Payment received)
credit term. Debit: Sales Discounts RM250 (Discount availed)
Credit: Accounts Receivable RM5,000 (Clearing the receivable)
• Discount Offer: 5% cash
Explanation: The receipt of cash and the discount availed are recorded.
discount if payment is made The receivable is cleared from the books, and the revenue is adjusted for
within 15 days. the discount.
 ACCOUNTING FOR SALES RETURNS IN RECEIVABLES
1. Sales Returns Overview: Example with Journal Entries:
 Definition: Occurs when a customer • Company: Fashion Boutique.
returns previously purchased goods, • Original Sale (July 1, 2023): Sold clothing worth
leading to a reversal of the original sale. RM1,000 on credit.
 Impact on Receivables: Reduces the Debit: Accounts Receivable RM1,000
accounts receivable, as the customer no
longer owes the full amount of the Credit: Sales Revenue RM1,000
original sale. • Sales Return (July 10, 2023): Customer returns
2. Accounting Treatment: clothing worth RM300 due to sizing issues.
Debit: Sales Returns and Allowances RM300
 Recognition: Sales returns are recognised
by debiting a sales returns account and Credit: Accounts Receivable RM300
crediting accounts receivable. • Explanation: The return is recorded by reducing
 Effect on Financial Statements: Decreases the receivable and recognising the sales return.
both revenue and accounts receivable on The net effect is a decrease in revenue and
the financial position. accounts receivable by RM300.
 SUBSEQUENT MEASUREMENT
• Overview: Post-initial Measurement at Amortised Cost
recognition, receivables are • Definition and Application:
subject to subsequent ✓ Used for measuring receivables that are not held for trading purposes.
measurement to reflect their ✓ Deducting any principal repayments and adjusting for accumulated amortisation.
current value and • Effective Interest Method:
creditworthiness. ✓ Allocate interest revenue over the relevant period.
• MFRS 9 Framework: ✓ The effective interest rate is the rate that exactly discounts the estimated future cash
Emphasizes accurate financial payments or receipts through the expected life of the financial instrument.
position and performance
representation, particularly • Practical Considerations:
concerning receivables’ ✓ For most trade receivables, the interest component is negligible, and the receivables
realisable value. are measured at the invoice amount, less any impairment.
• Objective: To ensure that ✓ Impairment reflects adjustments for non-payment risk (expected credit losses).
receivables are reported at Example:
amounts that represent the
expected cash inflows, • Company A sells goods worth RM15,000 on credit with a 90-day term.
adjusting for the risk of non- • Initial Entry: Debit Accounts Receivable RM15,000; Credit Sales RM15,000.
payment and time value of • If the effective interest rate is negligible, no interest income is recognised.
money.
• The receivable remains at RM15,000 unless there's evidence of impairment.
 UNDERSTANDING IMPAIRMENT OF RECEIVABLES: MFRS 9'S ECL MODEL
MFRS 9's ECL Model
• Overview: MFRS 9 introduces the Expected Credit Loss (ECL) model, a forward-looking approach that requires recognising credit
losses before a default occurs.
• Key Principle: Reflects a shift from the 'incurred loss' model to an 'expected loss' model, ensuring that entities recognise potential
credit losses at an earlier stage.
• Measurement of ECL: Involves estimating the present value of all cash shortfalls over the expected life of the financial instrument.
Lifetime ECL for Trade Receivables
• Entities must estimate and record expected credit losses over the entire lifetime of the receivable.
• Application to Trade Receivables: Particularly relevant for trade receivables, where the risk of default might change over time.
• Calculation Considerations: Takes into account historical, current, and forward-looking information, including macroeconomic
factors.
Simplified Approach
• Allows for the use of a provision matrix to determine ECL, simplifying the impairment assessment process.
• Provision Matrix: Typically based on historical credit loss experience, adjusted for current conditions and reasonable forecasts of
future economic conditions.
 THE INTERPLAY OF ECL, ALLOWANCE FOR DOUBTFUL DEBTS, AND BAD DEBTS

Expected Credit Losses (ECL): Allowance for Doubtful Bad Debts:

• Definition: Estimation of Debts: • Definition: Specific receivables
future credit losses on • Purpose: A reserve on the deemed uncollectible.
financial instruments like
receivables. financial position for • Writing Off: When deemed
expected future credit losses. uncollectible, written off
• Nature: Forward-looking,
considering past, current, and • Relation to ECL: Directly against the allowance for
future risk factors. influenced by ECL estimates. doubtful debts.
• MFRS 9 Compliance: Integral • Accounting: Represents a • Impact: Reduces both the
to MFRS 9, reflecting realistic provision made against allowance and the accounts
credit loss expectations. receivables. receivable balance.

The Relationship:
• ECL estimates lead to creating or adjusting the allowance for doubtful debts.
• Actual bad debts are then written off against this allowance.
• Reflects the actual credit loss experience against the estimated credit losses.
SIMPLE CASE: APEX
Accounting Entries
1. Sales on Credit (Throughout January 2023)

MANUFACTURING Debit: Accounts Receivable RM100,000

Credit: Sales Revenue RM100,000
Explanation: Recognition of various credit sales to customers.
• Initial Transactions: 2. ECL Estimation and Initial Allowance Creation (End of January 2023)
Throughout January Debit: Bad Debt Expense RM5,000 (5% of RM100,000)
2023, Apex Credit: Allowance for Doubtful Debts RM5,000
Manufacturing sells Explanation: Creation of an allowance for the estimated expected credit losses.
various products on 3. Mid-Year Adjustment to ECL (June 30, 2023)
credit to several • Scenario Update: Apex Manufacturing revised its ECL rate to 7% due to an economic downturn.
customers, totaling • Additional Allowance Needed: New ECL = 7% of RM100,000 = RM7,000; Additional Allowance = RM7,000 - RM5,000
RM100,000. (existing) = RM2,000.
Debit: Bad Debt Expense RM2,000
• ECL Estimation: Based
Credit: Allowance for Doubtful Debts RM2,000
on detailed analysis,
Explanation: Adjusting the allowance to reflect the updated ECL estimate due to worsening economic conditions.
including customer
4. Bad Debt Write-Offs (Various Dates in 2023)
credit ratings, past
• Scenario Update: Specific receivables totaling RM6,000 are identified as uncollectible.
experience, and
Debit: Allowance for Doubtful Debts RM6,000
economic forecasts,
Credit: Accounts Receivable RM6,000
Apex Manufacturing
Explanation: Write off specific bad debts against the allowance.
estimates an ECL rate
Summary of the Case
of 5% for its entire
• Credit Sales and Receivables: Recognition of sales and the corresponding receivables from various customers.
receivables portfolio.
• Initial and Adjusted ECL Provisioning: Creation of an allowance based on initial ECL estimation and its subsequent
adjustment due to changing economic conditions.
• Multiple Bad Debt Write-Offs: Recognition of actual bad debts at various times, leading to adjustments in the receivables
and the utilisation of the allowance.
 INDIVIDUAL ASSIGNMENT – DISCLOSURE OF RECEIVABLES
Under MFRS 7 "Financial Instruments: Disclosures" and MFRS 9 "Financial Instruments", certain disclosures are required for financial
instruments, including receivables. These disclosures are designed to provide users of financial statements with detailed information about
the nature, extent, and management of credit risk associated with receivables. Here's a summary of what needs to be disclosed:
Nature and Terms of Receivables
1. Details of the Nature of Receivables: A description of what the receivables represent (e.g., trade receivables, loan receivables).
2. Terms and Conditions: Including credit terms, interest rates, collateral, and other significant terms.
Credit Risk and Management
1. Credit Risk Exposure: Information on the entity’s exposure to credit risk and how it manages this risk.
2. Credit Quality of Receivables: Including ageing analysis, credit quality (e.g., based on internal or external credit ratings), and any
concentration of credit risk.
3. Impairment and Allowance Accounts:
 Policies for recognising impairment losses.
 Amounts recognised in profit or loss for impairment or reversal of impairment.
 Movement in the allowance for doubtful accounts, including the opening and closing balances.
Expected Credit Losses (ECL)
1. Basis for Measuring ECL: The methodology and assumptions used in calculating the expected credit losses, including the models and
significant inputs.
2. Reconciliation of Loss Allowances: A reconciliation from the opening balances to the closing balances in the loss allowance at the
reporting date.
Past Due and Impaired Financial Assets
1. Information on Past Due Status: The amount of receivables that are past due but not impaired.
2. Financial Assets that are Impaired: Details and amounts of receivables that are individually
determined to be impaired.
Modifications of Receivables
1. Renegotiated or Modified Receivables: Information about receivables whose terms have been
renegotiated or otherwise modified, which would affect their recognition, measurement, or
disclosures.
Fair Value Disclosures
1. Fair Value: If receivables are measured at fair value through profit or loss (rare for standard
receivables), disclosure of fair value measurements is required.
Other Disclosures
1. Collateral: Information about any collateral held as security and other credit enhancements.
2. Write-Offs: Details of receivables that have been written off during the period.

Required:
Using the Financial Statements of Apollo, Sunway Construction And Malaysian Resources Corporation,
explain the disclosure of receivables as mentioned in MFRS7 and MFRS9 .
THANK YOU