UNIT 3: RECEIVABLES

Definition, nature, recognition, measurement, derecognition, classification, presentation, analysis, financing

DEFINITION
• Receivables are financial assets that represent a contractual right to receive cash or another financial asset from
another entity [IAS 32.11]
o Financial assets include trade and other receivables [IAS 1.65]
• Amounts collectible from trade customers, related parties, and other parties
o Trade receivables – receivables from normal operating activity of the entity
§ Accounts receivable
§ Notes receivable
o Loans receivable
o Non-trade receivables
§ Claims receivables
• Suppliers (losses; damages)
• Carriers (losses; damages)
• Insurance companies
• Tax refunds and rebates
§ Accrued income
• Interest receivable/ Accrued interest income
• Dividend receivable/ Accrued interest income
• Rent receivable/ Accrued rent income
§ Advances to
• shareholders; officers; employees
• affiliates
• suppliers
§ Accounts payables with debit balance (due to overpayment, advance payment, returns,
allowances)
§ Deposits on contract bids
§ Deposits to guarantee performance
§ Subscriptions receivable
§ Others
• Receivable from disposal of property

NATURE
• Non-derivative financial asset
• Fixed or determinable payments
• May or may not have fixed term
• Holder has no intention to hold the asset until maturity
• Not quoted at an active market
• Holder can substantially recover the asset unless there is a credit deterioration

RECOGNITION
[IFRS 9.3.1.1] An entity shall recognise a financial asset in its statement of financial position when, and only when, the
entity becomes party to the contractual provisions of the instrument.

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ACCOUNTS RECEIVABLE
Short term receivables that arise from the ordinary course of business operations

Initial recognition
[IFRS 9.5.1.1] Except for trade receivables* at initial recognition, an entity shall measure a financial asset at its fair
value plus transaction costs that are directly attributable to the acquisition of the financial asset.

[IFRS 9.5.1.3] At initial recognition, an entity shall measure trade receivables at their transaction price** if the trade
receivables do not contain a significant financing component.

*Exception = Trade receivables are initially recorded at face value.

**Transaction price = the credit sale transaction that that seller or buyer records on the sales invoice

Reminders:
• The fair value of a financial asset is usually the transaction price (or original exchange price), that is, the fair value
of the consideration given.
• Short-term receivables are initially measured at face amount, or its original invoice amount.

Subsequent recognition
At the end of the reporting period, accounts receivable are reported at their net realizable value, that is the amount that is
expected to be realized or collected due to the risks involved in granting credit.

Methods of Estimating Loss on Accounts Receivable

ALLOWANCE METHOD
Method for accounting for doubtful accounts that estimates losses from uncollectible accounts and charges Doubtful
Accounts Expense in the period when sales are recorded
• Statement of Financial Position approach / Balance Sheet Approach
o Considers the balance of the Allowance account in making the provision
o The amount that is first computed is the required Allowance for Doubtful Accounts
§ Total Accounts Receivable at period-end
§ Aging of Accounts Receivable at period-end
- Analyses the Accounts Receivable into not due or past due

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A. Based on ACCOUNTS RECEIVABLE balance
The allowance for doubtful accounts is determined by multiplying the Accounts Receivable balance at the end of the
period by an assigned rate.
1. At a certain percentage of the accounts receivable
2. Increased to a certain percentage of the accounts receivable

Accounts Receivable xxx

Multiply by: Estimated uncollectible rate %
Allowance for Doubtful Accounts, end xxx
Less: Allowance for Doubtful Accounts, beg xxx
Doubtful Accounts Expense xxx

3. Increased by a certain percentage of the accounts receivable

Accounts Receivable xxx

Multiply by: Estimated uncollectible rate %
Doubtful Accounts Expense xxx

B. Based on AGING ANALYSIS

The allowance for doubtful accounts is determined by multiplying the ‘age groups’ of the Accounts Receivable at the
end of the period by assigned rates.

Step 1:
Classify accounts into ‘age groups’ of not due or past due
Step 2:
Calculate the Allowance for Doubtful Accounts, end by multiplying the total of each ‘age group’ by assigned rates
Step 3:
Calculate the Doubtful Accounts Expense

Allowance for Doubtful Accounts, end xxx

Less: Allowance for Doubtful Accounts, beg xxx
Doubtful Accounts Expense xxx

C. Based on percentage of sales

• Statement of Profit and Loss approach / Income Statement Approach
o Ignores the balance of the Allowance account in making the provision
o The amount computed is the required Doubtful Accounts Expense
§ Net credit sales for the year

Net sales xxx

Multiply by: Estimated uncollectible rate %
Doubtful Accounts Expense xxx

Definition of terms:
• Allowance [Provision] for Doubtful Accounts / Allowance for Doubtful Debts / Allowance for Uncollectible
Accounts – a valuation account that represents the expected amount of Accounts Receivable that may not be
collected at the date of the Statement of Financial Position
• Valuation account – an account that is revalued in light of reasonable expectations
• Net realizable value – amount that is expected to be realized or collected
– calculated as Accounts Receivable less Allowance for Doubtful Accounts
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Other Concerns for Accounts Receivable:

Writing off accounts receivable – Accounts Receivable that is certain not to be collected or deemed to be worthless
Allowance for doubtful accounts xxx
Accounts Receivable xxx

Recovery of write-off – recovery and subsequent collection of a previously written-off Accounts Receivable
Cash xxx
Miscellaneous Income xxx

Derecognition
[IFRS 9.3.2.3 to 9.3.2.6] An entity shall derecognise a financial asset when, and only when:
(a) the contractual rights to the cash flows from the financial asset expire
• Collection of accounts receivable
• Write-off of accounts receivable
(b) it transfers the financial asset and the transfer qualifies for derecognition
• Factoring of accounts receivable

NOTES RECEIVABLE
Claims* supported by formal promises to pay usually in the form of notes and usually requiring an additional receipt of
explicit interest

*These claims are understood to be the sale of merchandise or provision of service in the ordinary course of business and
do not include notes received from officers, employees, shareholders, affiliates which should be accounted for separately.

Initial recognition
• Short-term notes receivable – at face value since cash flows relating to short-term notes receivable are nopt
discounted because the effect of discounting is usually not material
• Long-term notes receivable – at present value
o If the nominal rate is lower than the effective rate, the note is said to be issued at a discount. In this
situation, the initial amount of the note to be recognized is lower than its face amount, which is the
present value of the long-term note on the date of issuance.
o If the nominal rate is higher than the effective rate, the note is said to be issued at a premium. In this
situation, the initial amount of the note to be recognized is higher than its face amount, which is the
present value of the long-term note on the date of issuance.

Definition of terms:
• Present value = sum of all future cash flows discounted using the prevailing market rate [effective rate; yield] of
interest for similar notes.
• Effective interest rate/ Market rate – rate used to determine the present value of a note or any other long-term
negotiable instrument; determines the interest income to be recorded by the payee
• Coupon rate/ Nominal rate – rate that determines the cash that the payee will receive regularly from the note;
could be zero if the note is non-interest bearing
• Amortized cost – amount at which the note is measured initially minus principal repayment and plus or minus the
cumulative amortization of any difference between the initial carrying amount and principal maturity amount

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Subsequent recognition of long-term notes receivable
After initial recognition, long-term notes receivable shall be measured at amortized cost using the effective interest rate

With discount
Note receivable, at face value xxx
Less: Discount on note receivable xxx
Carrying amount xxx

With premium
Note receivable, at face value xxx
Add: Premium on note receivable xxx
Carrying amount xxx

Derecognition
[IFRS 9.3.2.3 to 9.3.2.6] An entity shall derecognise a financial asset when, and only when:
(a) the contractual rights to the cash flows from the financial asset expire
• Collection of notes receivable
(b) it transfers the financial asset and the transfer qualifies for derecognition
• Discounting of receivable

CLASSIFICATION
[IAS 1.66]
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

Current assets
• Trade receivables – if reasonably expected to be collected within one year or within the normal operating cycle,
whichever is longer.
• Non-trade receivables – if reasonably expected to be collected within one year.

Non-Current assets
• Trade receivables – if reasonably expected to be collected beyond one year or the normal operating cycle.
• Non-trade receivables – if reasonably expected to be collected beyond one year.

PRESENTATION
• Trade receivables and non-trade receivables which are currently collectible shall be presented on the face of the
statement of financial position as one line item – trade and other receivables.
• It is shown after Cash and Cash Equivalents and Investment at Fair Value thru Profit or Loss.
• [IAS 1.78] Receivables are disaggregated into amounts receivable from trade customers, receivables from related
parties, prepayments and other amounts in the statement of financial position or in the notes.

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ANALYSIS OF ACCOUNTS RECEIVABLE
• Accounts receivable turnover ratio
o Also known as debtor's turnover ratio, is a measure of efficiency
o Refers to the number of times during a given period (e.g., a month, quarter, or year) the company
collected its average accounts receivable
o A higher accounts receivable turnover is favorable since this signifies that the entity is more efficient in
collecting its receivables.
o Formula: Net credit sales ÷ Average Accounts Receivable

• Average collection period

o An accounting metric used to represent the average number of days between a credit sale date and the
date when the purchaser remits payment
o Indicative of the effectiveness of the company’s receivable management practices.
o A shorter average collection period compared to the company’s normal credit term is favorable
o Formula: 365 days ÷ Accounts Receivable Turnover

RECEIVABLE FINANCING
Pledging Assignment Factoring Discounting
Receivable Accounts Receivable Accounts Receivable Accounts Receivable Notes Receivable
financed (AR) (AR) (AR) (NR)
Amount All All or specific All or specific Specific
Main feature Collateral for an Collateral for a loan Sale of AR Sale of NR with or
existing loan without recourse
Parties involved -Entity becomes a -Entity [Assignor] -Entity sells the AR -Entity that discounts
borrower becomes a borrower -Factor that buys the AR the NR
-Lender that gets the -Lender [Assignee] -Maker of the note
pledge -Lender
Who collects Entity Non-notification basis: Factor Lender
from the Entity [Assignor]
customer?
Notification basis:
Lender [Assignee]
Who owns the Entity Entity Factor Lender
receivables?
Disclosure -Carrying amount of Net position = Derecognition of the Derecognition of the
requirements the AR CA of assigned AR AR including any NR once discounted
-Terms of the pledge minus profit (loss)
CA of related liability

CA = Carrying amount
What will happen The lender will have The lender will have Factor bears all the Entity maybe liable if
if the debtor does ownership and control ownership and control losses discounting is with
not pay the of the AR of the AR recourse (MV plus
receivable? protest fee)

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REFERENCES:
• IFRS Foundation (2014, December) IAS 1 - Presentation of Financial Statements.
• IFRS Foundation (2011, December) IAS 32 - Financial Instruments Presentation
• IFRS Foundation (2014, July) IFRS 9 - Financial Instruments
• Salendrez, Herminigilda; Tubay, Jerwin; Paril, Alloysius Joshua; & Menaje, Placido Jr. (2021). Basic Approach to
Financial Accounting: User’s Perspective (Revised Edition). C&E Publishing.
• Valix, Conrado T., Peralta, Jose F., and Valix, Christian Aris M. (2020). Intermediate Accounting (Volume 1), GIC
Enterprises & Co., Inc.

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