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I. Concept of receivables
a. Are financial assets as defined in PAS 32
b. Have fixed or determinable payments that are not quoted in an active market (PAS 39)
Note: customers with credit balances current liabilities and not offset against debit balances in other
customers’ accounts, unless immaterial
IV. Measurement
a. Initial at fair value plus transaction costs that are directly attributable to the acquisition
i. For short-term receivables at original invoice amount (net of trade discounts, if any); not
discounted because of short duration
ii. For interest-bearing long-term receivables at face value
iii. For non-interest bearing long-term receivables present value of cash flows (discounted at
prevailing market price for similar receivables); contra-asset account is Unearned interest
income
b. Subsequent measurement
i. For non-interest bearing long-term receivables amortized cost using effective interest
method
ii. Long-term receivables are written down (directly or through an allowance account, Allowance
for loan impairment) if impaired, i.e., carrying amount of receivable is less than the present
value of cash flows discounted at the original effective rate of interest. Upon subsequent
collection, the allowance is reduced and interest income is recognized.
iii. For accounts receivable at net realizable value; i.e., gross amount less the following
allowances: allowance for freight charge, allowance for sales return, allowance for sales
discount, and allowance for doubtful accounts
Sales Return xx
Allowance for sales return xx
Sales discount xx
Allowance for sales discount xx
For the B/S approaches, amount computed represents the required allowance. This method results in
proper valuation of receivables in the balance sheet.
For the I/S approach, amount computed represents the bad debts expense. This method results in
proper matching of revenues and expenses in the income statement. Aging is done to test the
reasonableness of the allowance. Any discrepancy is considered a change in accounting estimate.
RECEIVABLE FINANCING
I. Pledge
a. An agreement whereby accounts receivable are used as collateral for loans.
b. Generally, the lender has limited rights to inspect the borrower’s records to achieve assurance that
the receivables do exist.
c. Generally, on non-notification basis; i.e., customers continue to pay to original obligee.
d. The debt is paid by the borrower, whether or not pledged receivables are collected.
Accounting Issues
a. Amount of receivables pledged should be disclosed, either by parenthetical note in the face of the
F/S or in the notes.
b. Pledged accounts receivable continue to be shown as current assets of the borrowing entity.
c. The related debt should also be identified as having been secured by a pledge of receivables.
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factor and is considered a current asset. Final settlement of the factor’s holdback is made after the
factored a/r have been fully collected.
Source:
Notes from Prof. Florendo