ACCOUNTS RECEIVABALE

Definition
- Receivables are financial assets because they represent a contractual right to receive cash or
another financial asset from another entity.
- Receivable are initially measured at fair value plus transaction costs and subsequently
measured at amortized cost.

Classification According to FS Presentation

Trade Receivables – these are claims arising from the sale of merchandise or services in the
ordinary course of business. These claims are classified as current assets because they are
expected to be realized in cash within the normal operating cycle or one year, whichever is
longer. It includes:
1. Account receivables – are open accounts or those not supported by promissory notes.
2. Notes receivables – those supported by formal promises to pay in the form of notes.

Nontrade Receivables – represent claims arising from sources other than the sale of
merchandise or services in the ordinary course of business. These claims are classified as current
assets when they are expected to be realized in cash within one year notwithstanding the length
of the operating cycle. Otherwise, they are classified as noncurrent assets. They are presented as
current assets when they are expected to be realized in cash within one year, the length of the
operating cycle notwithstanding.

Examples:
1. Receivables from shareholders, directors, officers or employees – classified as either
current or noncurrent assets depending on the period of its collectability.
2. Advances to affiliates – usually treated as noncurrent assets.
3. Advances to supplier for acquisition of merchandise – current asset
4. Subscriptions receivable – current assets if collectible within one year. Otherwise, they
are shown as a deduction from subscribed share capital.
5. Creditors’ accounts with debit balances – results from overpayment or returns and
allowances. Classified as current assets. If the debit balances are not material, an offset
against the creditors’ accounts with credit balances may be made and only the net
accounts payable may be presented.
6. Special deposits on contract bids – classified as either current or noncurrent assets
depending on the period of its collectability.
7. Accrued income (dividends receivable, accrued rent income, accrued royalties’ income
and accrued interest on bond investment) – current assets.
8. Claims receivable (claims against common carriers for losses or damages, claim for
rebates and tax refunds, claims from insurance companies) – current assets

Initial Measurement of Receivables

PFRS 9, paragraph 5.1.1, states that a financial asset shall be recognized initially at fair value
plus transaction cost that are directly attributable to the acquisition.

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 Long-term Receivables
Short-term
Interest-bearing Noninterest-bearing
Receivables
Fair value Face value or Face value Present value of all future cash flows
equivalent original invoice discounted using the prevailing market rate
amount of interest for
similar receivables.

Presentation of Receivables
Trade and nontrade receivables that are currently collectible shall be presented on the face of the
statement of financial position as one line item called trade and other receivables. However, the
details of the total trade and other receivables shall be disclosed in the notes to financial
statements.
Note:
Customers’ credit balances are classified as current liabilities. If the debit balances are not
material, an offset against the customers’ accounts with credit balances may be made and only
the net accounts receivable may be presented.

Accounts receivable are open accounts or those not supported by promissory notes arising from
sale of merchandise or services in the ordinary course of business.

Initial Measurement
• at face value or original invoice amount

Subsequent Measurement
• at net realizable value (NRV) which means the amount of cash expected to be collected or
the estimated recoverable amount
• In estimating the NRV of trade accounts receivable, deductions for the following are
made:
1. Allowance for freight charge – occurs when the goods are sold at the FOB
destination but shipped freight collected with the understanding that the freight
will be paid by the buyer and will be deducted from the receivable of the seller.
The seller records this by debiting freight out and crediting allowance for freight
charge.

FOB destination – ownership of the goods sold is vested in the seller until it reaches the buyer.
Thus, the seller shall be responsible for freight charge.
FOB shipping point – ownership of the goods sold is vested in the buyer upon shipment. Thus,
the buyer shall be responsible for freight charge.
Freight collects – freight charge is not yet paid and will be collected from the buyer.
Freight prepaid – freight charge is already paid by the seller.
2. Allowance for sales returns – recognizes the probability that some customers will return
goods that are unsatisfactory or will claim a reduction of the amount due in case of shipment
shortages and defects.
3. Allowance for sales discount – these are estimates of cash discounts granted to customers
for their prompt payment at the end of the period based on past experience.
Allowance for doubtful accounts – estimates of uncollectible accounts. It recognizes the risk that
some customers will not pay their accounts.

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Accounts Receivable
Less:
Allowance for
Doubtful Accounts
Allowance for Sales
Discounts Allowance
for Sales Returns
Allowance for
Freight Charge
Net Realizable Value

Accounting for Sales Discount

1. Gross method - the accounts receivable and sales are recorded at gross amount of the invoice.
2. Net method - the accounts receivable and sales are recorded at net amount of the invoice
(invoice price minus the cash discount)
Note:
Under the Net Method, Sales Discount Forfeited is classified as other income.
Accounting for Bad Debts/ Doubtful Accounts
• Generally accepted accounting principles require the use of the allowance method because it
conforms to the matching principle.
• Doubtful accounts expense is recognized if the account is doubtful of collection, as contrast to
the direct write-off method that recognizes bad debt expense if the account is worthless or
uncollectible.
Methods of Estimating Doubtful Accounts
1. Aging of accounts receivable (“Statement of financial position approach”)
2. Percent of accounts receivable (“Statement of financial position approach”)
3. Percent of sales (“Income statement approach”)
Note:
Aging of Accounts Receivable and Percent of Accounts Receivable presents the accounts receivable at
net realizable value. Under these two methods, the computed amount is already the ending balance of
allowance for doubtful accounts. Under the Percent
of Sales Method, the computed amount is the bad debt expense for the period.

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 Summary and Reflection
Summary:
Receivables are financial assets representing the right to receive cash or equivalent from another entity.
Initially measured at fair value plus transaction costs, they are later measured at amortized cost or net
realizable value (NRV). Trade receivables arise from selling goods or services in the ordinary course of
business, while nontrade receivables come from other transactions like advances, subscriptions, or
accrued income. Proper presentation and disclosure in the financial statements ensure clarity and
accountability.
Receivables are reduced by freight charges, sales returns, sales discounts, and allowances for doubtful
accounts. Methods for estimating doubtful accounts include aging of accounts receivable, percentage of
sales, or percentage of receivables. Sales discounts can be accounted for using the gross or net method,
with forfeited discounts recorded as other income. Notes receivable, formal promises to pay, require
proper recognition and measurement, and dishonored notes are transferred to accounts receivable.

Reflection:
Understanding receivables is essential for accurate financial reporting and cash flow management. Proper
classification and valuation ensure transparency, enabling businesses to evaluate their liquidity and credit
risk effectively. By using reliable methods to estimate doubtful accounts, businesses can prepare for
potential losses, enhancing decision-making and financial stability.

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 NOTES RECEIVABALE

Definition
are claims supported by formal promise to pay in the form of notes.

Note:
Standing alone, notes receivable represents only claims arising from sale of merchandise or
service in the ordinary course of business.

Measurement
INITIAL SUBSEQUENT
Present Value

Short Term NR PV = Face Value Face Value

Long Term NR: Amortized Cost
Interest Bearing PV = Face Value AC = FV
(PV upon issuance)
Non-interest PV = Discounted Value of future cash AC = PV + amortization of discount or
Bearing flows using the effective interest rate AC = FV - unamortized unearned
interest income

Dishonored Notes - are matured and unpaid notes.

Treatment of Dishonored Notes - Dishonored notes shall be removed from the notes receivable
account and transferred to accounts receivable at an amount to include, if any interest and other
charges.

Summary and Reflection

Summary:
Notes receivable represent claims supported by a formal written promise to pay in the form of promissory
notes. They are measured considering factors such as initial, subsidiary, short-term, long-term, and non-
interest-bearing conditions. Dishonored notes are those that have matured but remain unpaid; they are
removed from the notes receivable account and reclassified into accounts receivable.

Reflection:
Notes receivable are critical for ensuring financial liquidity and credit analysis. Proper classification and
accounting for dishonored notes allow businesses to manage cash flows effectively and maintain accurate
financial reporting. Understanding their measurement and treatment enhances decision-making and risk
management in business operations.

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 LOANS RECEIVABALE
Definition
is a financial asset arising from a loan granted by a bank or other financial institution to
a borrower or client.

Measurement
Initial - fair value (transaction price) plus transaction costs (origination fees) that are directly
attributable to the acquisition of the financial asset.

Subsequent - amortized cost using effective interest method

Origination Fees
• fees charged by a bank against a borrower for the granting of a loan.
Treatment of Origination Fees
• recognized as unearned interest income and amortized over the term of the loan.
Direct Origination Cost
• origination fees not chargeable against a borrower.
Treatment of Direct Origination Cost
• deferred and amortized over the term of the loan.
Note: The origination fees received and the direct origination cost are included in the carrying amount of the
loan receivable. Direct origination cost may be offset against unearned origination fees.
Origination fees > Direct origination Origination fees < Direct origination cost
cost • difference is charged to direct origination cost and
• The difference is unearned amortization decreases interest income.
interest income and
amortization increases interest
income.
Impairment of Loan
Indicators:
• significant financial difficulty of the issuer or obligor
• breach of contract, such as default or delinquency in interest or principal payment
• debt restructuring, such as granting of concession
• probability that the borrower will enter bankruptcy or other financial reorganization
• disappearance of an active market for the financial asset because of financial difficulty
observable data indicating that there is a measurable decrease in the estimated future cash flows from a
group of financial assets since the initial recognition of those assets, although the decrease cannot yet be
identified with the individual financial assets in the group

Measurement of Impairment
• amount of the loss is measured as the difference between carrying amount of the loan receivable and
the present value of the estimated future cash flows discounted at the original effective interest rate of
the loan
• carrying amount of the loan shall be reduced either directly or through the use of an allowance
account
• Amount of impairment loss shall be recognized in profit or loss

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 Summary and Reflection
Summary:
A loan is a financial asset provided by a bank or financial institution to a borrower and is initially measured
at fair value plus transaction costs, such as origination fees. These fees are treated as unearned interest
income and amortized over the loan's term. Impairment in loans can occur due to financial difficulties,
breaches of contract, debt restructuring, bankruptcy risks, or a significant decline in estimated future cash
flows. The impairment loss is calculated as the difference between the loan's carrying amount and the
present value of estimated future cash flows, discounted at the original effective interest rate.

Reflection:
Understanding loan accounting is vital for financial institutions to manage risks and ensure accurate
financial reporting. Identifying impaired loans and calculating impairment losses help assess credit risk and
maintain transparency in financial statements. This process strengthens financial stability and fosters
informed decision-making.

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 RECEIVABALE FINANCING
Definition
is the financial flexibility or capability of an entity to raise money out of its receivables.

Most Common Forms of Receivable Financing Used in Practice:

a. Pledging of accounts receivable
b. Assignment of accounts receivable
c. Factoring of accounts receivable
d. Discounting of notes receivable

Pledging of accounts receivable is usually made when obtaining loans from banks or any other lending
institution. The pledged receivables shall serve as a collateral security for the payment of the loan.
Accounting Treatment
• Doesn’t require necessary entry in the books. Disclosure of such transactions in the financial
statements is enough.
• Accounting for the loan is done in the usual manner as any other loan.
Assignment of accounts receivable
• evidenced by a financing agreement and a promissory note both of which the assignor signs
• specific accounts receivable serve as a collateral security
• The assignee usually only lends a certain amount in consideration for the assigned accounts in order to
protect itself from factors that may lead for the assigned accounts to be not fully realized such as sales
discounts, sales returns and allowances and uncollectible amounts
• Service or financing fee is also charged by the assignee for the assignment agreement.
Notification basis Non-notification basis
• the customers are informed that their • customers are not informed of the assignment of
accounts had been assigned and accounts receivable and therefore still make their
therefore make their payments to the payment to the assignor
assignee directly
Accounting Treatment for Assignment of accounts receivable
• The entry to record the assignment under both basis involves reclassification of accounts receivable to
accounts receivable-assigned.
Presentation
• The accounts receivable assigned is included in the carrying amount of accounts receivable but
disclosure is necessary.
Factoring is a sale of accounts receivable, thus, ownership of accounts is transferred.
Note: The new owner of the accounts receivable which is usually a bank or finance, also called the factor,
assumes full responsibility over the collection of accounts including risks of non-collection.
Forms of Factoring
a. Casual factoring b. Factoring as a continuing agreement
• Recorded as normal sale 🗶 Recorded as normal sale
• Recognition of loss on factoring • Recognition of loss on factoring (Factoring fee or

commission)
• Provision of factor’s holdback*
Note: *a predetermined amount for protection against customer returns and allowances and other special
adjustments. Factor’s holdback is actually a receivable from factor and classified as a current asset.

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Presentation for Factored Accounts Receivable
• Excluded from total accounts receivable. (derecognized)

Discounting of Notes Receivable

• To discount the note, the payee must endorse it. Thus, legally, the payee becomes an endorser and the
bank becomes an endorsee.
Terms Related to Discounting of Note
1. Net proceeds refer to the discounted value of the note received by the endorser from the endorsee. Net
proceeds = maturity value minus discount
2. Maturity value refers to the amount due on the note at the date of maturity. Maturity value = principal
amount plus interest
3. Maturity date is the date on which the note should be paid.
4. Principal is the amount appearing on the face of the note. Also known as face value.
5. Interest as used for this discussion refers to the interest for the full term of the note. Interest =
principal X rate X time
6. Interest rate is the rate appearing on the face of the note.
7. Time is the period within which interest shall accrue. For discounting purposes, it is the period from
the date of note to maturity date. It is the full term of the note.
8. Discount is the amount of interest deducted by the bank in advance. Discount = maturity value X
discount rate X discount period
9. Discount rate is the rate used by the bank in computing the discount. This is a different rate from that
of interest rate. If there is no discount rate given, then it is safe to assume that the interest rate is also
the discount rate.
10. Discount period is the period of time from the date of discounting up to maturity date. Simply put, it is
the unexpired period of the note.
Accounting for Discounting of Notes Receivable
With Recourse Without Recourse
a. Conditional sale b. Secured Discounting with recourse doesn’t require
The discounted notes receivable shall be borrowing recognition of contingent liability since the
excluded from the total notes receivable A liability for notes sale of the note receivable is absolute. The
but a contingent liability for the same receivable shall be difference of the carrying amount of the note
amount is appropriately disclosed. recognized. and proceeds shall be recognized in profit or
loss.

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 Summary and Reflection
Summary:
Receivable financing allows an entity to raise funds using its receivables as collateral. Common forms
include pledging, assignment, factoring, and discounting. Pledged receivables act as collateral for loans and
are disclosed in financial statements. Assignment involves transferring specific receivables as collateral,
with the assignee lending a certain amount based on the assigned accounts. Factoring involves selling
receivables, with the buyer assuming full responsibility for collections and risks. Discounting of notes
receivable involves endorsing the note to a bank, with the treatment varying between secured borrowing
and conditional borrowing, with contingent liabilities disclosed for discounting with recourse.

Reflection:
Receivable financing is crucial for improving liquidity and providing entities with immediate cash flow.
However, understanding the different methods and their accounting treatments ensures transparency and
helps mitigate risks, particularly in cases of non-collection or contingent liabilities. Accurate financial
reporting and appropriate disclosures help stakeholders make informed decisions based on the entity's
financial flexibility and risks.

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