PFRS 9: RECEIVABLES

- Financial asset representing a contractual right to receive cash or other financial assets from another party
- Entity’s unconditional (only the passage of time is required) right to consideration

Measurement:
● Initial – Fair Value + Transaction Costs (directly attributable costs)

● Subsequent – Amortized Cost (Beg Bal +/- Amortization – Principal Repayment – Impairment Loss)

Classification:

Normal Operating Cycle – time between acquisition and realization in cash; if not clearly identifiable, assumed to be 12
months
Special Considerations: the following are nontrade
● Advances to Affiliates/Subsidiary/Officers – generally noncurrent

● Subscription Receivable – current asset if within 12 months, deduction from subscribed share capital if beyond

● Suppliers’ Debit Balances – current unless immaterial

● Special Deposits / Contract Bids – generally noncurrent

● Claims Receivables – always current

● Customers’ Credit Balances – current liability

Recognition: when entity becomes a party to the contractual provision

Trade Receivables
Measurement:
● Subsequent – Net Realizable Value (Gross End
● Initial – Invoice or Transaction Price, net of Bal – Allowances)
trade discount and amounts collected in behalf Note: Short-term receivables are not discounted
of third parties e.g., VAT because effect is immaterial.
T-Account:
 *Only include if also included in collections. Collections
are gross of cash discounts.

Types of Discounts:
● Trade – to encourage to buy in bulk; known as quantity discounts; not recognized in the books

● Cash – to encourage to pay dues early; known as early payments discount (e.g., 2/10, n/30); only one discount
will be given
o Gross Method – initially, cash discount is not yet deducted and recognized only when actually taken;
most common and widely used as it is the practically correct method
o Net Method – net of discounts offered; theoretically correct method
o Allowance Method – receivable is recorded at gross while sales is recorded at net; difference is credited
to allowance for sales discount account and also uses sales discount forfeited account.

Pro-forma Entries Gross Method Net Method

Initial Recording A/R xx A/R xx

Sales xx Sales xx

Payment – within discount period Cash xx Cash xx

Sales Discount xx A/R xx

A/R xx

Payment – beyond discount period Cash xx Cash xx

A/R xx A/R xx

Sales Discount Forfeited xx

Account still Outstanding as of Year- Sales Discount xx No entry.

End – within discount period
Allowance for SD xx

Account still Outstanding as of Year- No entry. A/R xx

End – beyond discount period
Sales Discount Forfeited xx

Allowances:
● Allowance for Sales Return – deducted in computing net sales, while actual sales return is deducted when
computing for A/R
● Allowance for Sales Discount – deducted in computing net sales, while actual sales discount is deducted when
computing for A/R
● Allowance for Freight Charge

● Allowance for Doubtful Accounts

 o Direct Write-off Method – not permitted under GAAP; used only for income tax purposes
o Allowance Method – promotes conservatism thus permitted
Direct Write-Off Allowance*

Estimation of Doubtful Accounts No entry. Doubtful Accounts Expense xx

Allowance for DAE xx

Write-off Doubtful Accounts Expense xx Allowance for DAE xx

A/R xx A/R xx

Recovery A/R xx A/R xx

DAE or Gain xx Allowance for DAE xx

Cash xx Cash xx

A/R xx A/R xx

*only bad debt expenses decrease working capital.

Methods of Estimating Doubtful Accounts Expense: changes are considered a change in accounting estimate
● Percentage of Sales – income statement approach thus DAE
Sales xx
Multiply by: Uncollectability %
Doubtful Accounts Expense xx
● Percentage of Accounts Receivable – balance sheet approach thus ADA
Accounts Receivable, end xx
Multiply by: Uncollectability %
Allowance for Doubtful accounts, End xx
Less: Allowance for Doubtful Accounts, Beg. (xx)
Doubtful Accounts Expense xx
● Aging of Accounts Receivable – similar to % of accounts receivable but involves classification of accounts
according to their ages
Age* Amount Uncollectability Total (Amount x %)

Not due XX % XX

1-30 days past due XX % XX

31-60 days past due XX % XX

More than 60 days past due XX % XX

Allowance for Doubtful Accounts, End XX

Less: Allowance for Doubtful Accounts, Beg (XX)

Doubtful Accounts Expense XX

*Credit terms will determine the age past due. Ex: 2/10, n/30 and account is 50 days old, it is considered
to be 20 days past due
Note: Combination of different methods is allowed under GAAP.

Notes Receivable – receivable presented as a promissory note

Measurement:
● Initial

● Subsequent – Amortized Cost

Computing the Present Value – sum of all future cash flows discounted using the prevailing market rate of interest
(effective interest rate) at date of issuance of note
1. Know the contractual cash flows.
a. Long-term Non-interest Bearing – Principal only
b. Long-term Interest Bearing – Principal & Nominal Interest
2. Know the timing of cash flows.
a. Lumpsum or Unequal or w/interruption:
PV of 1

b. Annual & Equal w/o interruption:

i. 1st payment is 1 period after:
PV of Ordinary Annuity

ii. 1st payment is today: or simply PV of Ordinary Annuity

PV of Annuity Due
x (1 + interest)

Further Clarifications:

● ● Revenue or Selling Price = Down Payment + Initial Measurement of N/R

● Net Amount Presented in P/L

o Trade P/L = Sales – Cost of Sales + Interest Income
o Non-trade P/L = G/L on sale + Interest Income
● Interest Income is always based on effective interest, while interest receivable is based on nominal interest

● Dishonored Notes – not paid at maturity date; should be transferred from note receivable to account receivable
account including its interest and other fees charged
 ● There is implied interest revenue when cash price equivalent is used.

● To compute carrying amount, use amortization table.

Date Nominal Effective Amortization Principal Carrying
Interest (% x Interest (% x (NI - EI) Repayment (-) Amount
FA) CA)

1/1/20x1 XX

12/31/20x1 XX XX XX XX XX

12/31/20x2 XX XX XX XX XX*

*This is the noncurrent portion for 20x1 while the current portion will be the difference in CA.

Loans Receivable – financial institution grants or lends money to another entity; same nature with long-term note
receivable interest bearing with unreasonable rate thus most of the time on a discount

Measurement:
● Initial = Face Value + Direct Origination Costs (transaction costs) – Origination Fees (unearned interest income)

● Subsequent = Amortized Cost

Note: Indirect origination costs are expensed outright.

Impairment of Loans – expensed in P/L

Carrying Amount (Amortized Cost + Accrued Interest) xx
Less: Recoverable Amount (PV of Future Cash Flows @ Orig. EIR) (xx)
Impairment Loss xx

Evidence of Impairment
● Significant financial difficulty of the obligor ● Probability of bankruptcy

● Breach of contract ● Disappearance of an active market

● Debt restructuring ● Measurable decrease in estimated future cash

flows
● Lender grants borrower a concession that the
lender would not otherwise consider
Note: Individually significant receivables not impaired shall be included in other receivables not individually significant
for collective assessment of impairment (Valix, 2011).

Three-Stage Impairment Approach

Stage 1 Stage 2 Stage 3

Scope Have not declined Have declined significantly Have objective evidence
significantly but do not have objective
evidence

Recognition of Impairment 12-month Lifetime

Computation Base of Face Amount or Gross Carrying Amount Net Carrying Amount
Interest Income
Sale of Loan
Cash Proceed xx
Interest Rate Swap xx
Call Option xx
Recourse Obligation (xx)
Fair Value of Service (xx)
Net Proceeds/Sale Price/Fair Value xx
Less: Carrying Amount (xx)
Gain/Loss on Sale xx

Receivable Financing – process of inducing cash inflows on receivables other than collections
● Pledging/Hypothecation – transferring general receivables as a collateral to a bank to obtain a loan; receivable
balance remains the same; informal thus doesn’t require journal entry but still needs to be disclosed; without
transfer of right to collect
Formula:
Face Value of Loan xx
Less: Discount on Loans Payable (xx)
Net Proceeds xx
● Assignment – just like pledge but for specific receivables; formal transaction thus requires journal entry; with
transfer of right to collect
o Notification Basis – debtors are notified thus they can direct payment to bank
o Non-notification Basis – debtors are not notified thus will continue to pay the entity
Formula:
Face Value of Loan xx Accounts Receivable xx
Less: Other Charges (xx) CA of Loans Payable* (xx)
Net Proceeds xx Equity on Assigned Accounts xx – disclosed
Note: Payment from debtors’ payment which first must be accounted for the interest then principal.
● Factoring – sale of accounts receivable to another entity (factor), usually a bank; always on a notification basis
o Without Recourse/Guarantee – outright sale thus derecognized; G/L shouldered by the bank; use if
problem is silent
Formula:
Face Value of A/R xx
Less: Other Charges (xx)
Factor’s Holdback/RFF (xx)
Net Proceeds xx
Receivable from Factor xx
Less: CA of A/R (xx)
G/L on Factoring xx

o With Recourse/Guarantee – borrowing with collateral transaction in substance; G/L shouldered by the
entity
Formula: same as without recourse but no G/L is recognized.
● Discounting – transfer or endorsement of N/R to another entity
o Without Recourse
o With Recourse
 ▪ Conditional Sale – creates contingent liability (equal to principal); with G/L; use if problem is
silent
▪ Secured Borrowing – creates actual liability; no G/L; pay protest fee if maker of note dishonors
Formula:
Maturity Value (Principal + Interest) xx
Less: Discount (MV x DR x DP) (xx) – consider also if period ends at end of year
Net Proceeds xx
Less: CA of N/R including Accrued Interest (xx)
G/L on Discounting xx – interest expense if secured borrowing