Meaning/Definition

Title/Term

Formula

Emphasis
Additional info.
RECEIVABLES

In accounting for receivables, let’s just always remember na it’s a financial asset, because it gives the entity the contractual right
to receive cash or another financial asset from another entity. Specifically, we classify it as financial asset at amortized cost, because
we hold it for collection, and the collection is SPPI (solely payment for principal and interest). Thus, initially – we measure it at fair
value + transaction costs, subsequently – at amortized cost. Sa concept lang na ito magfo-fall ang acctg treatment natin for all
receivables.

Accounts Receivable
Note : Presented here are the frequently asked questions for accounts receivables.

Initial Measurement : invoice price

FAQ 1 : What is the amount of gross receivables at year end?

AR beginning xx
Credit Sales xx
Less: Sales returns1 (xx)
Sales discounts (xx)
Collections (excluding recoveries)2 (xx)
Write-Offs (xx)
Equals Accounts receivable xx

Note 1. Ileless mo lang ang SRA kung talagang binalik ni entity yung goods, because that will consequently lowers AR, pero minsan
ang sales return ay thru cash refund, in this case, hindi mo dapat ideduct ang SRA from AR, dahil ang iki-credit mo ay cash.

Note 2. Once narecover ang receivables, irerecognize mo ulit ang AR (so dapat add the amount recovered sa AR), then pag ni-collect
mo idederecognize mo lang din, hence the effect is just offsetting, so kung 'di mo naman inaddback yung recovered AR, then exclude
the recoveries from the collections. To summarize:

Recovery added to AR = Include recovery sa collections

Recovery not added to AR = Exclude recovery sa collections

FAQ 2 : What is the amount of estimated sales returns in the current year?
Allowance for sales returns, beg xx
Add: Estimated sales returns (squeezed) xx
Less Actual Sales returns (this year) (xx)
Allowance for sales returns, ending xx

Notes:
✓ Actual sales returns is the one deducted from the AR.
✓ Estimated Sales returns is the one deducted sa sales to arrive at the net sales.

What is the allowance for doubtful accounts?

Allowance for doubtful accounts, beg xx
Add: Bad Debt Expense xx
Less Accounts written off (xx)
Add: Accounts recovered xx
Aestudy
Method of Estimating Doubtful Accounts

Method of estimating ADA What we’ll get? Advantage

Percentage of net credit sales Doubtful Account Expense Matching Principle
method
Percentage AR Required Allowance Asset valuation
Aging of AR Required Allowance Most detailed and accurate. Ito yung application
ng expected credit loss model.
Emphasizes asset valuation

Note :
✓ Be careful if the given ADA, beg is a debit balance or a credit balance.
✓ Sometimes percentage that will be use in estimating bad debts is not provided, we could get it by using the historical data
(depends on the provision of the Co, kung anong yrs yung iko-consider) but to compute for the percentage : (Written off –
recovery )/ Credit Sales.

What is the net realizable value/amortized cost of the receivables?

Accounts receivable xx
Less: Allowance for Sales returns (xx)
Less Allowance for Shipment of damaged goods (xx)
Less Allowance for Freight charge (xx)
Less Allowance for sales discounts (xx)
Less Allowance for doubtful accounts (xx)

Notes Receivable
Interest-Bearing Non-interest bearing
Short term : at face amount Short term : face amount

Long term: Long term:

Initial Measurement C1: Realistic Interest rate : face amount C1 : For cash – present value
C2 : Unrealistic interest rate : Present value C2 : For non-cash asset
1.) Cash Price Equivalent
2.) Present Value
Subsequent Measurement Interest : Face amount x nominal rate Interest : Amortized cost x EIR
Carrying Amount Carrying Amount : Amortized Cost
C1 : Short-term/Realistic : face amount Initial amt. x 1.interest rate
C2 : Unrealistic : Amortized cost Less : Principal repayments
Less : Allowance for impairment loss
Amortized Cost
BEWARE:

1.) Unrealistic rate means : mababa substantially ang stated interest rate kaysa sa prevailing market rate.
2.) Always see if the note payable in installment was paid in advance, kasi makakapekto yun whether ordinary annuity or
annuity in advance ang gagamitin mo.
3.) Sa non-interest bearing note be careful kung anong date tinatanong ang interest, since the basis of interest ay nag-iiba.

Aestudy
 4.) Notes receivable does not usually have transaction costs, pero kung meron man make sure na i-add mo yun sa initial
measurement.

Loans Receivable
Initial Measurement Fair value + transaction cost

Principal amount (initial FV)

Add : Direct Origination cost (transaction cost)
Less : Loan origination fees (paid by the borrower)
Initial Present Value
Subsequent Measurement Interest Income : Carrying amount of loans x effective interest rate
Interest receivable : Principal Amount x stated interest rate

Carrying amount of the loan:

Initial/Beg carrying amount
Less : Principal repayments
Add : Amortization of unearned interest income
Carrying amount of loan receivables*

*Test the carrying amount for impairment. See next page for discussion.

Rationale of the initial measurement of loans receivable.

As stated above, receivables are classified as financial asset at amortized cost, wherein yung initial measurement natin ay : fair value +
transaction cost. Now, specifically sa loans receivable, ang fair value dito ay yung principal at ang transaction cost naman ay yung mga
nagagastos ng bank to originate the contract, na tinatawag nating direct origination costs. Hence we add the direction origination cost and the
principal. So bakit kasama ang loan origination fees sa picture?

It’s a practice sa mga bank loans na sinisingil sa borrower ang transaction costs. Kung iko-connect natin yung pinag-aralan natin sa Working
capital Management, specifically sa short term financing (commercial bank loans), in computing the net proceeds, binabawas natin sa principal
yung transaction costs, right? In effect, yung talagang napautang lang ng bangko sa borrower ay yung principal + direct cost less origination
fees. Kaya naman every time, kino-consider natin ang direct origination costs at loan origination fees sa initial measurement, nagbabago na yung
effective interest rate ng loan, kasi kailangan nating ireflect yung true cost of credit (interest). Panong true cost of credit?

Halimbawa, 2M ang principal, 100k ang direct orig cost, 200k ang origination fee. Ang napautang talaga ng bangko ay 1.9M lang (2M+100K-
200K), kaya kung tatanungin tayo ng loan receivable initially, 1.9M ang isasagot natin. Pero note na ang babayaran pa rin ni borrower ay yung
principal amt na 2M at the maturity date. Yung 100k na excess, extra or additional interest income yun ng bangko, kaya naman yung 100k
initially, tini-treat natin siya as unearned interest income, siyempre unearned palang, dahil thru passage of time natin na-eearn ang interest.
Hence, subsequently, kung tinanong man tayo ng interest income, hindi lang yung interest na binabayaran ni borrower (principal amt x stated
interest rate) ang i-aaccount natin as interest, pero isasama natin yunna-amortize na portion ng unearned interest income. Thus, ang true cost
of credit (effective interest) ay hindi lang yung stated interest pero kasama na ron yung 100k.

Notes.

- Indirect origination cost is expensed outright

- 4-point nonrefundable fee means : 4 point meas 4% of principal amt.

Aestudy
Loan Impairment

TRIGGER ECL model to use Calculation Interest Income

Stage 1 credit risk not 12 month ECL Carrying amount -loan Gross carrying amount
significantly Less : Present Value x Effective interest rate
increased since initial Expected credit loss Interest income
recognition x Probability of default
Stage 2 Use when the credit Lifetime ECL Allowance for Impairment loss Gross carrying amount
risk significantly x Effective interest rate
increased Interest income
(underperforming)
Stage 3 Credit impaired Lifetime ECL Net Carrying amount
x effective interest rate

Note :

- Gross carrying amount in this context is gross of the allowance for impairment loss.
- In computing for the impairment loss, don’t forget to deduct the previous impairment losses that we recognize in the
prior years (allowance for impairment).
- Impairment loss and reversal of impairment is recognized in P&L
- There is no limit as to the gain recognized for the reversal.
- For loan impairment, the original effective rate (nominal rate kung no transaction costs initially) ang gagamitin mo to
compute the pv of all cash flows, minsan nagpoprovide kasi sa problem ng new effective rate, ignore it.

Aestudy
 Receivable Financing
Basic Concept : Acceleration of the collection of receivables, as a way of financing.

General Assignment/Pledging/Hypothecation

• The entire receivable will served as a collateral. So once na na-default in payment yung entity, the financing entity can
select any of the existing AR of the company to settle the debt. Hence, this is likewise termed as general assignment.
• No accounting entry with respect to the AR assigned, however disclosure shall be made.
Specific Assignment

Accounts Receivable use as a collateral/security

• Ang nagsilbing security dito ay specific receivable from a customer na. Hence called as specific assignment.
• Accounting enty that shall be made:
• Reclassification of AR to AR-assigned
o Dr AR – assigned
Cr AR
Note : Total AR pa rin yan, included pa rin ang AR assigned sa total receivable. Ginagawa mo lang yan para
madali mong madistinguish from all other AR, yung AR na inassign mo.
• Can be done in a notification or non-notification basis.
o Notification
▪ customer will remit to the assignee
o Non-notification:
▪ The customer will continue to remit to the entity.
▪ Then ireremit mo nalang sa lender/assignee

Common Questions:
Cash received from the Carrying amount of the AR- Carrying amount of the Equity on assigned AR
Assignment assigned liability
Face amount of liab Face amount of AR assigned Liab face amount Carrying amount of AR
Less: Finance charges Less : Collections Add: Interest accrued Less: Carrying amount of liability
Cash received Less: Sales Returns Less : Payment remitted Equity on assigned AR
Less : Write-offs Carrying amount of liability
Carrying amt of AR

Aestudy
 Sale of Accounts Receivable/Factoring

Brief Concept : This is sale of receivables at a discount to a finance company called a factor. Hence the name “factoring". This is a common
source of short-term financing.

Types of Factoring : With Recourse and Without recourse

With Recourse

• If with recourse, the entity will be secondary liable. Hence, kung hindi nagbayad si customer, the factor will proceed to the selling-
entity para singilin yung amount ng receivable factored.
• Considering the substance of the transaction, this is not an absolute sale, because there is still an existing risk retained by the entity,
as a result the entity shall, in addition to the sale, should account for a potential liability. If material, a provision shall be recognized,
specifically a recourse liability, which is measured at fair value.

ENTRY: Gross Amount of Receivable

Cash Less : Factoring Fee
Allowance for doubtful accounts Less : Interest expense
Finance charges Net Selling Price
Receivables from Factor (current receiv.)
Less : Factor’s holdback
Accounts receivable
Net Cash received
Loss on recourse obligation
Recourse liability (current liab)

Computation of Loss on Factoring

Service fee + Interest expense + Loss on recourse obligation
Note : Kung makocollect na lahat ng AR, huwag mo nang iconsider yung loss on recourse obligation, dahil free ka na sa possible obligation.

Without Recourse

• Pagdating sa without recourse, wala nang pakealam si entity after niya nang mabenta yung receivables. Thus, all risk and rewards
are transferred, hence considered as a sale both in substance and in form. Now pwede itong maging casual or regular factoring.

Casual vs. Regular Factoring

Casual Factoring Regular Factoring

Brief Concept Ang tawag din dito ay ‘spot factoring’ Also called factoring as a continuing agreement kung saan there will still
kung saan meron lang single be an ongoing relationship between the entity and the factor, after the sale.
transaction between the entity and the Dito pumapasok yung concept ng factor’s holdback.
factor.
Computation of net The proceeds provided by the factor Gross amount of AR
proceeds/cash which will be at a discounted amount Less: Service Fee
received (lower than CA). Siyempre para may Less: Adv. Interest expense
kita naman si factor. Net Selling Price
Less: Factor’s holdback
Net Cash received
Loss on Factoring Net Selling price – Carrying amt. of AR Net Selling Price – Carrying amt. of AR
Carrying amount : Face amount – Allowance for Doubtful Accounts

Aestudy
Sale of Notes Receivable/Factoring

Brief Concept: This is a sale of notes receivable at a discount.

Like factoring receivables, this is also categorized into : With recourse and Without Recourse

Without Recourse
• The entity will not be secondary liable
• Accounted for as a sale of Notes receivable

With Recourse
The sale of note with recourse may be treated by the company as a:
1.) Conditional Sale recognizing contingent liability
2.) Secured Borrowing
• Sa conditional sale, you will still consider the note financed as sale, yun nga lang ‘conditional’. Kaya naman you will
recognized a note receivable discounted which will be treated as a contra notes receivable account, and a disclosure of
contingent liability. The NR will not be derecognized yet.
• Secured borrowing on the other hand, is ultimately treated as a borrowing agreement, and the notes receivable acts as a
security, hence the term “secured borrowing”. Therefore, you’re not going to consider this as a sale, instead you’ll recognize
a liability.

SUMMARY OF JOURNAL ENTRIES

Without recourse With Recourse: Conditional Sale With Recourse : Secured Borrowing
Cash Cash Cash
Loss on NR discounting Loss on NR discounting* Interest expense (equivalent of loss)
Notes receivable Notes receivable discounted (contra NR) Liability for N/R discounted
Interest income Interest income Interest income
Subsequently dishonored Accounts receivable Accounts receivable
Cash** Cash**
Derecognition Note receivable discounted (contra NR) Liability for N/R discounted
Notes receivable Notes Receivable
Collection from the customer Cash Cash
AR** AR**
Interest income Interest income
*Loss on NR discounting in both w/o recourse & conditional sale is just the same.
**Cash/AR : Maturity value plus protest fee and other incurred fees, w/c will be then become A/R from the customer.
The contingent liab = note receivable discounted = liab for NR discounted = face amount of the note.

Aestudy
Beware : Ang nakakalimutan usually sa Notes receivable dishonored na may recourse liab, ay yung accrual of interest, which ang basis ay yung kabuuang
binayad ng entity (maturity value + relate fees), don’t forget!

Maturity Value (Principal + Interest)

Net Proceeds
Less : Discount on Note
Less : Carrying Amount of notes
Net Proceeds
Gain/Loss on Discounting

Discount on Note:
**Carrying amount of the Notes:
Maturity Value x discount rate x remaining period b4 maturity
Interest bearing : Principal Amount + Accrued Interest Note : Most of the time, ang frequent mistake dito ay hindi maturity value at
Principal lang ang nagagamit mo to compute for the discount.
Non-interest bearing : Principal or Face amount

Aestudy