Receivables: Related Standards

RECEIVABLES
Related standards:
• PFRS 9: Financial Instruments
• PFRS 15: Revenue from Contracts with
Customers
• PFRS 7: Financial Instruments: Disclosures
• PAS 32: Financial Instruments: Presentation
FAR PART 1A: Zeus Vernon B. Millan

Learning Competencies
• Identify the proper presentation of
receivables as either current or
noncurrent assets.
• Know the timing of recognition and
measurement of trade receivables.
• Know how to estimate the recoverable
historical cost of trade receivables.

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.” FAR PART 1A: Zeus Vernon B. Millan
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
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
Trade discounts are outright deductions from the list price,
are not recorded in the books of either the buyer or seller,
and are not accounted for separately.
Cash discounts are given to encourage prompt payment, are
deducted from the invoice price, and are accounted for
separately
• Traditional GAAP ( Gross method and Net Method) vs. PFRS 15
treatment

Accounting for Bad Debts
Two methods:
1. Allowance method
2. Direct write off method

Allowance method of accounting for bad debts
This method conforms to the concepts of accrual
basis of accounting, matching, and
conservatism in that, bad debt expenses are
recognized when they become probable so as
not to overstate receivables
• Journal entries
• T-account of the “Allowance for doubtful
accounts” account.
• T-account of the “Accounts receivable” account.
Direct Write-off method of accounting for
bad debts
Bad debt expenses are directly written-off from
the balance of accounts receivable only when
uncollectibility becomes certain or when the
account is deemed worthless, thus receivables
may be overstated prior to the write-off.

Estimating doubtful accounts
1. Percentage of net credit sales method – bad debt expense is
computed by applying a percentage on the net credit sales
during the period.
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.

• State the initial and subsequent measurement
of note receivables.
• Learn how to compute for present value
factors and how to properly apply them.
• Learn how to prepare amortization tables.
• Know how to compute for the effective
interest rate.

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 cost/PFRS
(for trade receivables) 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
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.

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.

• Explain the accounting for origination costs
and fees.
• Account for impairment of receivables.
• Identify the instances where derecognition
of receivable is appropriate.
• Know the accounting for each of the
common forms of receivable financing.

Impairment
• The expected credit loss model (ECL)

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.

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.
• Examples: Provision matrix and Single loss rate

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)
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

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RECEIVABLES

FAR PART 1A: Zeus Vernon B. Millan

FAR PART 1A: Zeus Vernon B. Millan

FAR PART 1A: Zeus Vernon B. Millan

• Non-trade receivables are classified as current assets

• Trade and non-trade receivables that are current

FAR PART 1A: Zeus Vernon B. Millan

• Under FOB destination, ownership is transferred only

FAR PART 1A: Zeus Vernon B. Millan

FAR PART 1A: Zeus Vernon B. Millan

FAR PART 1A: Zeus Vernon B. Millan

FAR PART 1A: Zeus Vernon B. Millan

FAR PART 1A: Zeus Vernon B. Millan

• A note receivable is a claim

FAR PART 1A: Zeus Vernon B. Millan

FAR PART 1A: Zeus Vernon B. Millan

FAR PART 1A: Zeus Vernon B. Millan

1. Short-term Face amount/ Present Recoverable historical

2. Long-term Face amount Recoverable historical cost

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

4. Long-term w/ Present value Amortized cost

FAR PART 1A: Zeus Vernon B. Millan

• PV of ordinary annuity ₱1 is used when the

FAR PART 1A: Zeus Vernon B. Millan

FAR PART 1A: Zeus Vernon B. Millan

FAR PART 1A: Zeus Vernon B. Millan

FAR PART 1A: Zeus Vernon B. Millan

FAR PART 1A: Zeus Vernon B. Millan

FAR PART 1A: Zeus Vernon B. Millan

• An entity shall always measure the loss

• Examples: Provision matrix and Single loss rate

FAR PART 1A: Zeus Vernon B. Millan

• Derecognition (of a financial instrument) means the

• A financial asset and a financial liability shall

FAR PART 1A: Zeus Vernon B. Millan

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