CIIAPTER 2

RECEIVABLES

Intcn[ef, Leaming Attcotus

! outstanding After rea[ing tfrk cfiapter, yu sfrouff 6e a6[e to:

1. fesci\e tfre ruture of recehtabbs;

2. ckssify receiva\fes accorfing to source;
3. state tfre appficahfe requirnnents of tfie IFWs refating to
receipaifes;
4. app$ tfie recognition an[ measurement principfes in ItrRS 9
financiaf Instruments an[ rrrq5 15 fuienue-from Contracts
r witfr Customers, refating to receiaa\fes;
5. formufate entries for transactions affecting notes an[
accounts receiaa|te;
6. formufate entries to account for [ifferent forms of receivalfe
ftnancing;
7. present anf cfassifi receiva\fes in tfre statement of financiaf
position; anf
f . ilentfytfre requiref discfosures for recehta\fes in tfie financiaf
statements.

Introduction
If an enterprise is to sustain its operations, it has to compete. In
today's economy where buying and selling goods and. services are done
through credit and borrowing arrangements, an impressively large
portion of an enterprise's resources is tied up to receivables.

NATURE OF RECEIVABLES

Receivables, in the broadest sense, represent any legitimate

claim from others for money, goods or services. In the narrower sense
and as contemplated in accounting, receivables represent claims that
are expected to be settled by receipt of cash. Loans and receivables are
financial assets within the scope of IFRS 9 Financial Instrumenfs/ and
IFRS 7 Financial Instntments - Disclosures.
 Chaoter 2 - Receiuables

For accounting purposes, receivables include the following:

1 Amounts collectible from customers and others, most frequently

arising from sales of merchandise, claims for money 1ent, or the
performance of services. They may be on open accounts or
evidenced by time drafts or promissory notes.

2 Accrued revenues, such as accnled interest, commissions, rental

and others.

3 Other items such as loans and advances to officers, employees,

affiliated companies, customers or other outside parties; legitimate
claims against suppliers and insurance companies; and other
claims arising from nonrecurring transactions such as calls for
subscriptions receivables and disposal of property.

CLASSIFICATION OF RECEIVABLES ACCORDING TO SOURCE

As to source or origin, receivables are classified either as trade

receivables or non-trade receivables.

Trade Receivables arise from sale of goods or services in the

normal course of business. These receivables should include only
charges for actual sales completed (when there has already been actual
or constructive delivery of goods or performance of services) on or before
the end of the reporting period.

Non-trade Receivables arise from sources other than from sale

of goods or services in the normal course of business. Specific examples
of non-trade receivables include:

a. Loans to officeqs and employees

b. Advances to affiliates
c. Accrued interest and dividends
d. Deposits to guarantee performance or payment or to
cover possible damages or losses
e. Subscriptions for the entity's equity securities
f. Claims for losses and damages
o
b' Claims for tax refunds or rebates
h. Claims against cbmrnon carriers for damaged or lost
goods

72
 Chapter 2 - Receluables

CLASSIFICATION OF RECETVABLES
IN THE STATEMENT OF FINANCIAL POSITION

In a properly classified statement of financial position, trade

receivables are generally classified as current assets because they are
collectible within the entity's normal operating cycle. The normal
operating cycle is the period required for cash to be converted into
inventories through purchase and production, inventories into
receivables through sa1e, and receivables back into cash or cash
equivalents through collection.

Where the normal operating cycle of the business extends

beyond twelve months because of long credit terms, as in the case of
certain installment receivables (e.g., installment sales for household
appliances), in which such accounts are an integral part of working
capital, it is appropriate to classify the receivables as current assets;
'however, the amount or estimate thereof not collectible within twelve
months should be disclosed.

Non-trade receivables that are expected to be collected within 12

months from the end of the reporting period are also classified as
current assets, regardless of the length of the entity's normal operating
cycle. Non.trade receivables that are not reasonably expected to be
collected within twelve months from the end of the reporting period are
reported as non-current assets. However, subscription receivable with
call date beyond twelve months from the end of the reporting period is
appropriately reported as deduction from shareholders, equit5r. This
classification is further presented overleaf in Figure 2.2.

Initial Recognition
Based on IFRS 9 FinanciatInstrumenfs, an entity shall recognize
a financial asset in its statement of financial position when and only
when, the entity becomes a patty to the contractual provision of the
instrument. Thus, trade receivables are recognized simultaneolls to the
recognition of the related revenues, either from sale of goods or
rendering of services.

Trade receivables are initially recognized at the transaction price.

Transaction price, as defined by IFRS 15 Reuenue from contracts tuith
customers, is the amount to which an entity expects to be entitled in
exchange for the transfer of goods and services (par. 47, IFRS 1S).

73
Chapter 2 'Receloables

Receivables

Did they arise from sale of

goods and services in the
normal course of business?

Yes No

Are they collectible

within 12 months
from the end of the
riod?
No

Report as Report as
current assets non-current
assets

Figure 2.1
Presentation on the Face of the Statement of Financial Position

ACCOUNTING FOR ACCOUNTS RECETVABLE

AND RELATED REVENUES

Trade receivables on open accounts and are not evidenced by

promissory notes or time drafts are called Accounts Receivable. These
are evidenced by sales invoices, delivery receipts and other similar
documents.

Trade and Cash Discounts

Trade discounts, afso known as volume or quantity discounts,

are means of converting a catalog list price to the prices actually
charged to the buyer. These may be used to make price differentials
different classes of customers, varJring quantities, or changes in
prices. Such trade discounts are also used to avoid frequent changes in
".rrorrg

74
 Chapter 2 - Receiuables

catalogs and to hide the true invoice price from competitors. They are
commonly quoted in percentage, and at times, series of percentages.

Trade discounts are not recognized for financial accounting

purposes. They are deducted from the list price prior to recording the
accounts receivable arising from a credit sales transaction. To state
simply, both accounts receivable and the related revenue are always
recorded net of trade discounts.

To illustrate, assume that on July 16, 2O2O, ABC Manufacturing

sells merchandise on account with a list price of P100,000, less trade
discounts of lOo/o, lOYo and 5%. The invoice price of the merchandise is
computed as follows:

List price P100,oo0

Less 1O%o x 1OO,O00 10.000
P 90,000
Less 107o x 90,00O 9,000
P 81,000
Less 57o x 81,000 4 050
Invoice orice P 76.950
Alternatively, the invoice.price may simply be computed as

10O,OOOx.9Ox.9Ox.95 P 76.950
Et
I Thus, the entry for the sale transaction is

Accounts Receiuable 76,950

Sales 76,950
F Cash discounts, or sales discounts from the seller's point of
view, are reductions from the sales price as an inducement for prompt
payment of an account. They are expressed in terms which may read
as: 2llO, n/3O (2% discount is granted if account is paid within 1O
days from the invoice date, gross amount due in 30 days); 3/15,n/6O
(3% discount is granted if account is paid within 15 days from the
invoice date, gross amount due in 60 days).

The timing of the recognition of the cash discounts is based on

the method of accounting adopted by the company for sales and the
related accounts receivable. These methods are as follows:

a. Gross price method,

b. Net price method, and
[' C. Allowance method.
[*-.

75
 Chaoter 2 - Receiaables

Cash discounts are recognized (a) when taken using the gross
price method, (b) when not taken using the net price method and (c)
when offered using the allowance method.

Gross Price Method. Under this method, both the account

receivable and sales are initially recorded at the gross sales price with
no accounting recognition of the available cash discount until it is
actually taken. When the discount is taken, it is debited to the sales
discounts account.

Assume that on July 76, 2O2O, ABC Manufacturing sells

merchandise on account with a list price of P100,000, less trade
discounts of lOoh, lO%o and 5o/o. The invoice price of the merchandise is
computed earlier as P76,950. Assume further that the credit terms
were 2f 10; n/30, FOB shipping point and freight paid to the shipper by
ABC Manufacturing amounted to P2,OO0. The sale on July 16,2O2O is
recorded as follows under the gross method:

Accounts Receiuable 79,950

Sales 76,950
Cash 2,000

The amount charged to accounts receivable includes the freight

paid on behalf of the customer. When goods are shipped FOB shipping
point, the title to the goods is transferred from seller to buyer at the
point of shipment; hence, the freight is for the account of the buyer.
This may also be termed as FOB shipping point, freight prepaid. Thus,
freight paid by the seller under this term is an amount collectible from
the buyer.

If the customer pays on or before July 26, 2O2O, which is within

the discount period of 1O days, the journal entry is

Cash 77,411
Sales Discount 1,539
Accounts Receiuable 78,950

The sales discount is computed based on the invoice price (2oh x

P76,950), which excludes the freight charges prepaid by the seller.

When the customer pays after July 26, wh:ich is beyond the
discount period, the journal entry is

Cash 78,950
Accounts Receiuable 78,950

76
 Chapter 2 - Receivables

While the gross method lacks conceptual validity, it is the

simplest and most widely used method because the cash discount is
usually immaterial and the record keeping is less complicated. Sales
Discounts are reported as deduction from Sales in the profit or loss
section of the statement of comprehensive income.
n

Under the gross price method, inasmuch as the sales discount is

II
recorded only when taken, it is possible that sales may have been
recorded in one reporting period, but the cash discount may have been
taken by the customer upon payment in the subsequent period. Thus, if
no adjustment would be taken up at year-end, both the sales revenue
and accounts receivable would be overstated in the financial
statements. To avoid such misstatement, an entry to recognize
hr anticipated sales discounts must be prepared at year-end, as follows:

Sales Discount xx
Allowance for Sales Discount xx

With the above adjusting entry, sales revenue in the statement of

comprehensive income is reduced by the anticipated sales discount, and
accounts receivable in the statement of financial position is reduced by
the allowance for sales discount. This brings the accounts receivable to
an amount potentially collectible in cash. For convenience, the above
adusting entry is reversed at the beginning of the subsequent reporting
period, so that the eventual collection is recorded by merely debiting
Cash at the amount of cash collected and Sales Discount at the amount
of cash discount granted (if collection is still made within the discount
period) and crediting accounts receivable at the gross amount of
receivable collected.

The gross price method is the most popular because of its

convenience. However, it may not faithfully represent the amount of
sales reported in the statement of comprehensive income, specifically,
when significant amounts of receivable are collected beyond the
discount period. The sales account is a mixture of two items of
revehues: revenue from sales to customers and the finance income
earned by the entity because of the lapse of the discount period granted.
x
Net Price Method. Under the net price method, both the
accounts receivable and the sales are recorded at the sales price less
.he the available cash discount (the net price). Using the previous
illustration, ABC records the sales transaction on July 16 as follows:

Accounts Receiuable 77,411

Sales 75,41 1
Cash 2,000

77
 Chapter 2 - Receiuables

The company does not recognize the cash discount if it collects

the account within the discount period. Hence, if ABC is able to collect
the above account on or before July 26, it shall prepare this entry:

Cash 72,411
Accounts Receiuable 77,471
If collection is made beyond the discount period and therefore,
the cash discount is not taken by the customer, the difference between
the amount collected (the gross price) and the amount originally
recorded (the net price) is credited to the sales Discounts Forfeited (or
sales Discounts Not Taken) account. If ABC collects the account after
July 26, it shall prepare the following entry:

Cash 79,950
Sales Discounts Forfeited 1,539
Accounts Receiuable 77,411

The balance of sales Discounts Forfeited account is reported as

other operating income (or finance income) in the profit or loss section
of the statement of comprehensive income.

The net method is theoretically superior over the gross method,

because it initially recognizes the accounts receivable at its amortized,
cost. This method strictly adheres to IFRS 15 which requires that
variable considerations resulting from discounts, rebates, refunds,
credits, price concessions, incentives, penalties or other similar items
shall be estimated by the entity to minimize reversal of reverrue in the
future when an uncertainty has been resolved.

The net method requires an adjusting entry at year-end for sales

discounts forfeited on accounts receivable that have passed the
discount period. The year-end adjusting entry is

Accounts Receiuable xx
Sales Discounts Forfeited xx
Allowance Method. Under the allowance method, the accounts
receivable is recorded at the gross sales price, the sales revenue is
recorded at net amount and the available cash discount is recorded as a
credit in the valuation account, Allowance for sales Discounts. If in
the previous illustration, ABC uses the allowance method, it would
prepare the following entry on July 16.

Accounts Receiuable 78,950

Alloutance for Sales Discounts 1,539
Sales 75,411
Cash 2,OOO

7a
 Cha;pter 2 - Receioables

The sales discount is recognized when it is offered to customer

I using the account allowance for sales discount.

The collection on or before J:uly 26 is recorded as follows:

Cash 77,411
Alloutance for Sales Discounts 1,539
Accounts Receiuable 78,950
I The collection beyond the discount period is recorded as:

h- Cash 78,950
Alloutance for SaZes Discounts 1,539
Sales Dsco unts Forfeite d 1,539
Accounts Receiuable 78,950

Under the allowance method, an adjusting entry is made at year-

end when the account remains uncollected and the discount period has
already lapsed. The adjustment cancels the related allowance for sales
discount, thus increasing tlne'amortized cost of accounts receivable.
Such year-end adjusting entry is

Allotuance for Sales Dscounts xx

Sales Dsco unts Forfeited xx

The Allowance for Sales Discount account is a valuation account

that reduces accounts receivable to its amortized cost. Sales Discounts
Forfeited is presented as other operating income in profit or loss section
of the statement of comprehensive income.

With appropriate adjusting entries, the choice of the method

used does not make any difference in the amortized cost of accounts
receivable reported in the statement of financial position.

Credit Card Sales

I

Credit card sales involving a national credit card company result

[-, in an accounts receivable in the narne of the card-issuing company.
t: Credit card fees, normally ranging from loh to Soh of net credit card
l: sales, reduce the value of the accounts receivable. The account Credit
t
Card Service Charge would be reported as an operating expense in profit
tr_ or loss.

Assume that MS Department Store has Citibank Visa

drafts/receipts that total P1,2O0,000 on Decembet 20 The entry to
record the Citibank Visa sales would be

79
 Chapter 2 - Recehnbles

Accounts Receiuable -Citib ank Viso 1,2OO,OOO

Sales 1,2OO,OO0

citibank subsequently remits to sM the corresponding amount

oJ salesreduced by service fees charged. Assuming a 26/o service fees by
the bank, which is recognized by SM as a selling -"*p"r"., the entry in
the books of SM is

Cash 1, j76,Ooo
Credit Card Seruice Charge 24,OOO
Accounts Receiuable-Citibank Visa 1,2OO,O0O

There are some credit card companies that allow the retailer to
deposit credit card drafts/receipts directly to a current account. The
bank receives the deposit slip and credit card drafts/receipts and
increases the retailer's current account for the total amount less the
bank credit card service charge.

under such arrangement, credit card sales of MS Department

Store is recorded as

Cash 1,176,000
Credit Card Seruice Charge 24,OOO
Sales 1,200,oo0
The transaction is, in effect, a cash sale and the retail companies
do not establish a receivable from the card issuing bank. The credit
card sales are the responsibility of the bank that issued the credit card
and the customers pay directly to them. Meanwhile, uncollectibles from
these transactions are considered as losses for the card issuing bank.

ACCOUNTING FOR NOTES RECEIVABLE

A note receivable is a formal claim against another that is

evidenced by a written promise, called promissory note, or a written
order to pay at a later date, ca-lled time draft.

A promissory note is an unconditional written agreement to pay

to bearer or to the of the payee a certain sum of ,ro.r"y or,
9ld.ldate.
specific or determinable A time draft is a written order (mlde by"
the drawer), addressed to the drawee to pay a certain sum of *orr.y oi.
a specific or determinable date. A time draft may be a two-party draft
(drawer orders drawee to pay the drawer) or a thiee-party draft (irawer
orders drawee to pay another party, which is the pry.";.

Trade notes generally arise from sale involving relatively high

peso amounts where the buyer wants to extend p.ym.rt period u"yoia
80
 Chapter 2 - Receluables

the usual credit period. Likewise, sellers sometimes request notes from
customers whose open accounts have become past due.

L
A note or draft that provides for the payment of interest for the
_-!
period between the issuance date and the due date is called an interest-
j1 bearing note. On the date of the receipt of the note, the present value of
an inter-est-bearing note, which bears a realistic interest rate, is equal to
its face ualue. Subsequent to the date of the note or the draft, the
present yalue of an interest-bearing note is equal to its face value plus
accrued interest.

Initial Recognition
.o
.--e
Following IFRS 9, a note receivable is initially recognized when
-.d the entity becomes a party to the contractual provision of the
-1e
instrument; that is, when the entity becomes the payee of the note
issued by the maker. A note is initially recognized at the transaction
price based on the circumstance that gives rise to the receipt of the
r' tt note, which is any of the following;

(a) the amount of cash given up in exchange for the note;

(b) the fair value of the non-cash consideration given up in

exchange for the note, or if such fair value cannot be
practically determined, the fair value of the note received,
-:S which is the discounted cash flow of future collections,
-.it based on an implicit interest rate.
.:d
:n Interest-Bearing Notes Receivable

The fair value of an interest-bearing note is generally its face

value, unless it is clear that the interest rate stated in the note does not
reflect a realistic interest rate.

is Illustrative Problem for Interest-Bearinq Notes

:n
To illustrate accounting for interest-bearing trade notes
receivable, assume the following selected transactions completed by
lv ABC Corporation during 2O2O:
'a
ry Aug. 5 Received a 60-day, 9%, P12,000 promissory note from X
ln Company for merchandise sold.
ft
er Oct. 4 Collected from X Company in settlement of its note dated
August 5.

3h Received a 30-day, 72o/o, PL6,OOO promissory note from Y

rd Company in settlement of an overdue account.
81
 Ch.apter 2 - Receiuables

Nov. 6 Received a l2O-day, l2o/o, P24,OOO promissory note frorn Z

Company in settlement of an account.

9 Y Company dishonored its note on maturity date

30 Collected the amount due from Y Company on account of its

overdue note. An additional charge for interest at L2Vo on
maturity value from maturity date is a-lso collected.

Dec. 31 Year-end adjustments are made

The following are the journal entries for the given transactions:

Aug. 5 Notes Receiuable 12,000.00

Sales 12,000.00

Oct. 4 Cash 12,180.00

Notes Receiuable 12,000.00
Interest Reuenue 1BO.OO
I= PL2,OOO x 9% x 60/ 360*

10 Notes Receiuable 16,OOO.00

Accounts Receiuable 16,000.O0

Nou. 6 -lflofes Receiuable 24,OOO.OO

Accounts Receiuable 24,OOO.OO

9 Accounts Receiuable 16,160.00

lVofes Receiuable 16,OOO.OO
Interest Reuenue 160.00
I = P16,OOO x 12% x 3O/ 36O*
Nou.30 Cash 16,273,12
Accounts Receiuable 16,160.00
Interest Reuenue 1 13.12
I= 16,160x12%x21/360*
Dec. 31 Interest Receiuable 440.OO
Interest Reuenue 440.OO
I=24,000x12%x55/360"
*The computations of interest in the foregoing entries are based
on a 360-day year.

To qualify for reporting as Notes Receivable, the note must be

negotiable; that is, it must be payable to order or bearer and must not
yet be due. Thus, a dishonored note receivable does not qualify to be

a2
 Cholpter 2 - Receittables

Z
reported as Notes Receivable in the statement of linancial position'
Overdue notes from customers, together with accmed interest thereon,
are generally reclassified as accounts receivable. Other descriptive
accoint titles, such as Dishonored Notes Receivable or Overdue Notes
Receivable, may also be used.
S
tn when a noti: makes no provision for interest, it is said to be non-
interest-bearing or zero-interest beaing. However, a non-interest
bearing note does not necessarily mean that there is no interest
accruiig on the receivable. The promissory note is simply written in a
form wliere the face value already includes an imputed interest for the
term ofthe note.

when a non-interest bearing note is exchanged solely for cash

)0 and no other rights or privileges zrl.e exchanged, the presemt ualue or
amorti.zed cost oj the noie on the date it is received is equal to the cash
bearing note is exchanged for
-property, exchanged. If a non-interest
proceeds
)0 goods, or services, the transaction is recorded at the fair value
)0 lf tfr. gooa" or services received, unless the fair value of the note is
more clearly determinable. when neither fair value is practicably
determinabl,e, an imputed rate is used to determine the present value of
the note.
)n
when a note bears an interest rate that is significantly different
from prevailing interest rate for similar notes, or when the face value of
)0 the note is iignilicantly different from the market value of the
consideration given up in exchange for the note, the interest rate stated
on its face is considered to be unrealistic. The amortized cost of the
)0 note on the date it is received is equal to the present value of principal
)0 and interest payments discounted at the imputed interest rate, which
should approximate the market rate of interest for similar instruments.

The difference between the face amount of the note and its
00 present value is recorded as discount or premium. The excess of the
12
iace value of the note over its present value is credited to Discount on
Notes Receivable, while the excess of the present value of the note over
its face value is charged to Premium on Notes Receivable. The discount
or premium is amortized to interest revenue over the term of the note
00 using the effective interest method. Any unamottized discount is
deducted from the ledger balance of the Notes Receivable, and any
unamortized premium is added to the balance of the Notes Receivable,
:d to arrive at ihe arnortized, cost to be presented in the statement of
financial position.
le in accounting for,interest-bearing and
To illustrate the difference
.rt non-interest bearing non-trade notes receivable, consider the following
te independent cases.

83
 Chapter 2 : RecelAfuleS

Case 1: Long-Term Interest-Bearing Note with Realistic Interest Rate

On January l, 2019, ABC Manufacturing sells an equipment

costing P800,000 and with accumulated depreciation of P450,000. The
company receives as consideration P100,000 cash and a 15o/o interest-
bearing note for P400,000 due on December 31,2021. The interest on
the note is payable annually every December 31. The prevailing rate of
interest for a note of this type is 15%.

The entries relative to the note for its entire three-year term are
as follows:

2019
Jan. 7 Cash 100,000
Ifofes Receiuable 400,000
Accumulate d D ep re ciatio n- Equipment 450,OOO
Equipment 800,ooo
Gain on Sale of Equipment 150,OOO

Sales price of equipment (1OO,O0O + 4OO,OOO) P500,ooo

Carrying value of equipment (800,0O0 - 45O,OOO) 350,000
Gain on sale of equipment P150.OOO

2019
Dec. 31 Cash 60,ooo
Interest Reuenue 60,000
Receipt of annual interest
(15% x 4O0,OO0)

2020
Dec.31 Cash 60,000
Interest Reuenue 60,000
' Receipt of annual interest

2021
Dec. 31 Cash 460,000
Nofes Receiuable. 400,ooo
Interest Reuenue 60,000
Collection of note and interest due

In the statement of financial position on December 31, 2AL9, the

Notes Receivable balance of P400,000 shall be shown as part of non-
current assets, because the note is scheduled for collection two years
from the end of the reporting period. On December 31, 2O2O, the same
note will be classified as part of current assets, because it is expected to
be collected within 12 months from that date.

84
 Chapter 2 - Receirnbles

ease 2: Lons-Term Non lnterest Beating Note

On January l, 2OI9, ABC Manufacturing sells an equipment

costing P800,000 with accumulated depreciation of P45O,OO0. The
company receives as consideration P1O0,0OO cash and a non-interest-
bearing note for P4OO,OOO due on December 31, 2021. The prevailing
interest for a note of this type is 15%.
2019
Jan. 1 Cash 100,000
E.:
/flotes Receiuable 400,000
A ccumul at e d D ep r e ci atio n- E quip ment 450,000
Equipment 800,o00
Discount on Notes Receiuable 137,O00
Gain on Sale of Eqttipment 13,000

Face value of note P400,000

I Present value of note (0.6575 x 4OO,OOO) 263.000
-)
Discount on notes receivable P137.OOO

Cash received P100,ooo

Add present value of note 263.000
Total sales price of equipment P363,000
E Carrying value of equipment 350.000
Gain on sale of equipment P-l3pO0
) The transaction is recorded at the present value of the note's
maturity value, since there is no available fair value for the equipment.
The maturity value of P4OO,OOO is discounted at the prevailing interest
rate of l5%o for 3 periods. The difference between the face value of the
note and its present valu,e is recorded as a credit to Discount on Notes
Receivable. On each reporting date, a certain portion of discount on
) notes receivable is amortized and transferred to interest revenue using
the effective interest method.

Amortization Table

Ii ,c
-.1
Date Interest Revenue Amortized Cost
J 1 2019 263,000
December 3l,2Ol9 39,450 302,450
December 3l,2O2A 45,368 347,8t8
t-- December 3I,2O2l 52,182* 400,000
t

F
*Adjusted; difference is due to rounding off.
l-s
i::
h.,

85
 Chapter 2 - Receltnbl*

The following are the entries relating to the note subsequent to

its receipt on January l,2Ol9.
2019
Dec.31 Discount on Notes Receiuable 39,450
Interest Reuenue 39,450
Amortization of dis count
75o/o x 263,000

2020
Dec.31 Discount on Notes Receiuable 45,368
Interest Reuenue 45,368
Amo rtiz atio n of di s c ount
15%x(263,A00+39,450)
2021
Dec.31 Cash 400,000
Discount on Notes Receiuable 52,182
Notes Receiuable 400,000
Interest Reuenue 52,182
Collection of note and ftnal
amo rtization of dis count
137,OOO - 39,450 - 45,368

On December 31, 2019, the balances are as follows

Notes Receivable P400,o00

Discount on Notes Receivable (137,000 - 39,450) 97 550
Carrvins value of the note P302,450

The note is shown as a non-current asset on December 31,2079

statement of financial position at its amortized cost of P302,450.

On December 31, 2O2O, the balances are as follows:

Notes Receivable P400,000

Discount on Notes Receivable (97,550 - 45,368) 52 r82
Carrying value of the note __!311j]9_
The note is classified as a current asset on December 31,2O2O
statement of financial position at its amortized cost of P347,818,
because it will be due within 12 months from the end of the reporting
period.

On December 31, 2021, which is the maturity date of the note,

the remaining balance of discount on notes receivable is transferred to
interest revenue simultaneous to the collection of the principal amount.

86
 Chaoter 2 - Receiuables

Case 3: Lonq-Term Non-Interest Bearinq Installment Notes Receivable

On January 1, 2019, ABC Manufacturing sells an equipment

costing P8OO,00O and with accumulated depreciation of P450,0O0. The
company receives as consideration P100,000 cash and a non-interest-
r:, bearing note for P300,000 due in equal amounts of PIOO,OOO every
December 31, starting December 31,2019. The prevailing interest for a
note of this type is 15%.
2019
Jan. 1 Cash 100,ooo
--l lVotes Receiuable 300,000
A ccttmul at e d D ep r e ci atio n- E quip me nt 450,000
.Loss on Sale of Equipment 21,680
Equipment BOO,000
Dscount on Notes Receiuable 71,680

.0 Because the note received is collectible in installments of

:2 P1OO,OO0.for three years, the present value of the note is computed
using the present value of an ordinary annuity. The present value
factor of an ordinary annuity of 1 discounted at l]soh for three periods is
2.2832.

Face value of note P300,000

Present value of note (1OO,OOO x 2.2832) 228,320
l Discount on notes receivable P 71.680
[]l
u: I Cash received P100,000
Add present value of note 228.320
Total sales price of equipment P328,320
)
Carrying value of equipment 350,000
Loss on sale of equipment P 21.680
The following amortization table shows the amount of interest
revenue that is recognized at the end of 2olg,2O2O and 2O2l:
r0

Fii Amortization Table

A B C D
Applied to Balance of
tr Interest Applied to Principal
L5 Periodic (Previous D Principal (Previous
Date Payment x 15%) (A_B) D-C)
January l,2Al9 228,s20
-:, December 31,2079 100,000 34,248 65,752 162,569
F
.l December 3l,2O2O 100,000 24,385 75,615 86,953
t
t December 3L,2O2l 100,000 13,o47* 86,953
* Adjusted; difference is due to rounding off.

a7
Chapter 2 - Receiaables

Based on the given table, the entries at December 31,2019,

2O2O and 2021. ate as follows:

2019
Dec. 31 Discount on Notes Receiuable 34,248
Interest Reuenue 34,248
Amortizatio n of dis count

31 Cash 100,o00
Ifofes Receiuable 100,000
Collection of first installment

2020
Dec. 31 Discount on Notes Receiuable 24,385
Interest Reuenue 24,385
Amortizatio n of dis count

31 Cash 100,ooo
Ifofes Receiuable 100,ooo
Collection of second installment

2021
Dec. 31 Dscount on Notes Receiuable 13,047
Interest Reuenue 13,047
Amortizatio n of dis count

31 Cash 100,000
Ifotes Receiuable 100,ooa
Collection of third and final
installment

The balances of Notes Receivable and the related Discount on

Notes Receivable on December 31, 2019 are anaTyzed as follows:

Non-
Total Currenl Current
Notes Receivable P200,000 P100,000 P100,000
Discount on Notes Receivable 37,432 24,385 13.o47
Carrying amount P162.568 P 75.615 P 86.953

Based on the amorttzation table, the amount of the principal

(and accrued interest, if any) that is due within twelve months from the
end of the reporting period is classified as current asset, and the
remainder is classified as non-current.

88
 Chapter 2 - Receiuables

Case Lons-Term Installment Note Receivable (Stated Interest Rate is

4.
Lower than the Market Rate of Interesti

On January l, 2019, ABC Manufacturing sold a tract of land

that originally cost P4OO,O0O. ABC received a P6OO,OO0 note as
payment for the land. The note is payable in three annual installments
*,J of P2OO,OOO beginning December 31,2019 plus interest at the rate of
4%o based on the outstanding balance. At January l, 2019, the
prevailing rate of interest for a similar obligation is 10%.

) If a cash price for the land is determinable at the date of the

sale, the cash price is the selling price and, consequently, the present
value of the note. Thus, an imputed interest rate shall be computed.
Otherwise, the selling price is the fair value of the note, which is derived
by discounting al1 future collections (principal and interest) using the
5 prevailing interest rate for similar notes, as hereby illustrated.

The computation of the present value of the note on January 1,

2019 is as follows:
)
Interest
Due Total Present Present
Principal (Balance Amount Value Value, Jan
Due Date (P) Due of P x 4oh) Due Factor 1,2019
-7 t2/3t/19 P200,000 P24,OOO P224,OOO 0.90909 P203,636
t2/3t/20 200,000 16,000 216,000 o.82645 178,313
t2/st/2r 200,000 8,000 208,000 o.75t32 L56,275
TOTAL P538.424
)
Face value of note P600,000
Present value of note 538.424
Discount on notes receivable P 6t.576

Present value of note (Sales price of land) P538,424

Carrying amount of land 400 000
L Gain on sale of land PJ38=324
L
lt The journal entries for the sale of land and subsequent collection
of installments on the note, including amortization of discount, follow
t= (See amounts from the amortization table):

I
2019
Jan. 1 Notes Receiuable 600,000
Discount on Notes Receiuable 61,576
Land 400,ooo
Gain on Sale of Land 138,424

89

I
--
Chapter 2 - Receiuables

Dec.31 Cash 224,000

Discount on Notes Receiuable 29,842
Notes Receiuable 200,ooo
Interest Reuenue 53,842
2020
Dec. 31 Cash 216,000
Discount on Notes Receiuable 20,827
Notes Receiuable 200,000
Interest Reuenue 36,927
2021
Dec. 31 Cash 208,O00
Discount on Notes Receiuable 10,907
.lVofes Receiuable 200,ooo
Interest Reuenue 18,907

Amortization Table
Note
Effective Nominal Discount Principal Carrying
Date Interest Interest Amortization Payment Value
01/ot/19 538,424
12/3t/t9 53,842 24,OOO 29,842 200,000 368,266
t2/3r /20 36,927 16,OOO 20,827 200,ooo 189,093
12 /sl/2t 18,907* 8,OOO 10,907* 200,000
*adjusted; difference is due to rounding off

The balance of Notes Receivable and the related Discount on

Notes Receivable on December 31, 2019 is analyzed as follows:

Non-
Current Current
Total
Notes Receivable P400,000 P200,000 P200,000
Discount on Notes Receivable 31.734 20,827 10.907
Carrying Amount P368.266 Pt79.t73 P189.O93

Case 5. Long-Term Installment Note Receivable (stated Interest Rate is

Hieher than the Market Rate of Interest)

On January I, 2019, ABC Manufacturing sold a tract of land

that originally cost P4OO,OOO. ABC received a P600,OOO note as
payment for this transaction. The note is payable in three annual
installments of P2oo,Ooo beginning December 31, 2019 plus interest at
9()

I
 Chapter 2 * Receiuahles

the rate of 14%o based on the outstanding balance. At January 1,

2019, the prevailing rate of interest for a similar obligation is 1O%.

The given case is similar to Case 4, except that the rate stated
on the face of note exceeds the market rate of interest. The computed
amortized cost at the date of initial recognition would result to an
amount higher than the face of the note, resulting in a premium on
notes receivable.

The computation of the present value of the note on January 1,

2019 is as follows:
Interest
Due Total Present Present
Principal (Balance Amount Value Value, Jan
Due Date (P) Due of P x 4o/ol Due Factor l,2019
L2/3tlL9 P200,000 P84,000 P284,000 o.90909 P258,t82
t2 I 31 120 200,o00 56,OO0 256,O00 o.82645 2Ll,57l
12/3Ll2t 200,o00 28,OO0 228,OOO o.75132 17 1 ,301
TOTAL P641.054

Present value ofnote P641,054

Face value of note 600.ooo
Premium on notes receivable P 41.054
Present value of note (Selling Price) P64t,O54
Carrying amount of the land 400.000
Gain on sale of land y2aJ-95!

Amortization Table
Note
Effective Nominal Premium Principal Carrying
Date Interest Interest Amortization Payment Value
p 07 /ot /t9 641,O54
L 12/31/19 64,105 84,OO0 19,895 200,ooo 421,159
12/3r /20 42,116 56,000 13,884 200,000 207,275
fr
t-
12/3r/2t 20,725 28,OOO
*Adjusted; difference is due to rounding off.
7,275* 200,000

Based on the given computations and amortization table, the

entries for 2019 through 2027 are as follows:
2019
Jan. 1 Notes Receiuable 600,000
Premium on Notes Receiuable 41,054
Land 4OO,O0O
Gain on Sale of Land 241,054

91
---7- Chapter 2 - Receiuables

Dec. 31 Cash 284,OOO

.flfofes Receiuable 200,000
Interest Reuenue 64,105
Premium on Notes Receiuable 19,895
2020
Dec.31 Cash 256,000
Ifofes Receiuable 200,000
Interest Reuenue 42,116
Premium on Notes Receiuable 13,884

2021
Dec.31 Cash 228,OOO
Receiuable
.flflofes 200,000
Interest Reuenue 20,725
Premium on Notes Receiuable 7,275

The balances of Notes Receivable and Premium on Notes

Receivable on December 31, 2079 are anaJyzed as follows:
Non-
Tota-l Current Current
Notes Receivable P400,000 P200,ooo P200,000
Premium on Notes Receivable 21.159 13.884 7.275
Carrying Amount P421.159 P2t3.884 P207.275

MEASUREMENT SUBSEQUENT TO INITIAL RECOGNITION

Notes and accounts receivable meet the requirements in IFRS 9

Financial Instruments for the financial assets to be classified as
subsequently measured at amortized cost. The two conditions are:

(a) the financial asset is held within the enterprise's

business model whose objective is to hold assets in order
to collect contractual cash flows; and

(b) the contractual terms of the financial asset give rise on

specified dates to cash flows that are solely payments of
principal and interest (SPPI).

The amortized cost of receivables is its principal amount plus

accrued interest and any unamortized premium and minus the
unamortized discount using the effective interest method, and minus
any reduction (directly or through the use of an allowance account) for
impairment or uncollectibility. Thus, amortized cost of notes receivable,
is the ledger balance of Notes Receivable account (plus any accrued
interest receivable, if interest bearing) plus any remaining balance of
Premium on Notes Receivable, or in the case of discount, minus any
remaining balance of Discount on Notes Receivable. In case some
92
 Chapter 2 - Receiuables

portion of the receivable is assessed to be impaired, the amount believed

to be uncollectible shall also be deducted.

Accounts receivable that are granted within the entity's usual

credit terms are not generally discounted to their present value, because
any amount of the discount or interest is usually immaterial.

Impairment of Receivables
Almost invariably, some receivables will prove u5rcollectible,
such that an amount of accounts or notes receivable must be
recognized as expense in profit or loss. This is called impairment loss,
or more popularly called uncollectible accounts expense or bad debts
expense.

There are two methods of accounting for uncollectible accounts

the direct write-off method and the allowance method.

The direct write-off method recognizes impairment loss or bad

debts expense by crediting directly the receivables account. The entry
to recognize impairment on accounts receivable is
)
Bad Debts Expense (or Uneollectible Accounts
Expense or Impairment Loss) xx
Accounts Receiuable (or Notes Receiuable) xx

Some accounts, which have been previously written off are

unexpectedly recovered or collected. In such a case, the entries to
recover an account require its reinstatement and the collection recorded
in the usual manner. Thus, to record recovery under the direct-write off
method, the entries are
Accounts Receiuable xx
Bad Debts Recouery @r Recouery xx
of Preuious Impairment of Receiuable)

Cash xx
Accounts Receiuable xx

The direct write-off method is the only method allowed for

income tax purposes. The allowance method, on the other hand,
requires the use of valuation account for the receivables. This method
recognizes the impairment of receivables by a charge .to Bad Debts
Expense or Impairment Loss and a credit to the allowance account.
Thus, the entry to recognize impairment is

h-:

93
 Chaoter 2 - Recefunbles

Bad Debts Expense (or Impairment Loss) xx

Allowance for Bad Debtst xx
The resulting balance of allowance for bad debts is deducted
from accounts or notes receivable to arrive at its amortized cost. when
an account considered to be definitely uncollectible is written off, the
entry is

Allowance for Bad Debts xx

Accounts Receiuable xx
Uncollectible account witten off

when an account previously written off is recovered, the account

should be reinstated and the collection should be recorded. Thus, the
entries for the recovery are
Accounts Receiuable xx
Alloutance for Bad Debts xx
Reinstatement of an account recouered
Cash xx
Accounts Receiuable xx
Collection of an account
preuiouslg witten off

under the allowance method, the write off of an uncollectible

account does not change the net amount of accounts receivable nor
does it affect profit or loss.

simplified Approach and General Approach of Measuring and

Recognizing Expected Credit Loss

IFRS 9 presents two models for measuring and assessing

expected credit loss (ECL): the simplified approach and the general
approach.

Simplified Approach

IFRS 9 requires a simplified approach for trade receivables or

contract assets with no significant financing component (sFC) that arise
from the application of IFRS ls Reuenue from contracts with customers.
Likewise, entities may also choose as its accounting policy the ECL
simplified approach for receivables and contract assets with sFC, that
arise from application of IFRS 15 as well as for lease receivables that are
recognized in accordance with IFRS 16 Leases. under the simplified

1A modern terminology for this

account is Allowance for Expected Credit Loss
or simply Loss Allowance.
94
 Chspter 2 - Receitables

approach, an entity measures its expected credit loss without applying

the 3 stages under the general approach. The simplified approach
requires an entity to measure impairment loss based on lifetime
expected credit loss of financial assets. It seems that IFRS 9 considers
the collection period of the trade receivables to be generally within
twelve months or shorter; hence, there may be no need for the more
complicated stages 1,2 and 3 under the general approach.

To illustrate, assume that on April 1, 2O2O, ABC Manufacturing

wrote off an account of its customer, Mr. X in the amount of P25,000
which has been overdue for several years now. Subsequently, on July
5, 2O2O, ABC recovered and collected the account of Mr. X. Journal
entries for the write off and subsequent recovery of the account are as
follows:

2020
Apr. 1 Alloutance for Expected Credit Loss 25,OOO
Accounts Receiuable - Mr. X 25,000
Wite off of an uncollectible account

Julg 5 Accounts Receiuable - Mr. X 25,000

Alloutance for Expected Credit Loss 25,OOO
Reinstatement of ttrc account of
Mr. X preuiouslg u.titten off

Cash 25,0O0
@l(:
Accounts Receiuable - Mr. X 25,OOO
Collection of art aceount recouered

At year-end, the amount of accounts receivable that may prove

to be uncollectible must be estimated. An appropriate adjusting entry is
then prepared as follows:

Impairmenf ,Loss - Acrounts Receiuable xx

Alloutance for Expected Credit Loss )(x
Lifetime expected credit loss on AR

In some cases, the allowance for expected credit loss may result
in a debit balance before year-end adjustment. This may indicate that
there have been excessive write-offs during the period and the previous
estimate of the company may not be adequate. In such a case, the
company has to review the basis of estimating its expected credit loss
and should bring its uncollectible accounts to the appropriate balance
at year-end based on the most reasonable estimate. An error in making
such previous estimates is not considered an accounting error and
95

-/
 Clusts 2 - Receiaabl*
changing the basis for estimating the expected credit
considered as a change in
loss is not
poricy. Both-are treated as
"""orrrti.rg
change in accounting estimates, and uringrng irr"
its apcropriate barance at year-end account to
*o.rIa be"rm*"nce
co.rsidered as an
adjusrment to the current year;s impairment loss.

A debit' barance in the anowance account before adjustment

sho,ld not, however, read to a conclusion that trr. prlrrllrs
the company is always inadequate, as the accounts estimate of
writtenoff during the period may also arise from current that have been
year,s sales. It
is merely that the entry for the-write on i"
end entry to provide for bad debts expbnse. fr"p"."J"ll"a
-at of the year_
tn" end of the year, after
the adjusting entry is prepared, tlhe alrowance account
brought to a credit barance ttrat reasonabry brings shourd be
receivable to its recoverable amount. the accounts

General aoproach

For all other financial assets within the scope of

general approach to ECL is applicable. IFRS 9, the

The new IFRS 9 Financiar Instruments provides a most

sis1ifi.ca1t change in the measurement of impairment
entity's financial assets. IFRS 9 adopts a modei rosses on an
that requires an entity
to .recognize expected credit rosses at arl times and
estimate of expected credit losses at each reporting to update its
aate to reflect the
changes in the credit risk of financia_l instruments.

IFRS 9 requires an entity to measure its

expected credit losses
not necessarily based on a loss event but based'on
supportable information available without undue reasonable and
which includes pg:t experiences, present condition cost and effort and
expectations. The IFRS 9 moves from the incurred and future
IAS 39) to the more prudent "expected credit
loss model (under
loss,, mod.er. The IFRS 9
model requires three stages in impairment measurement
recognition: and

(a) Stage 1

Recognize in profit' or loss, through an allowance

account, an impairment loss based on 12_month
expected credit rosses for receivabres that that
credit impaired and with no significant increase
are not
risk;
in credit

96
 F

Chopter 2 - Receiaables

:10t (b) Stage 2

AS
:to Recognize in profit or loss lifetime expected credit losses
an for receivables that are not credit impaired but with
significant increase in credit risk. Effective interest is
calculated based on the gross carrying amount of the
:nt receivables.
.of
:aen (c) Stage 3
It
Assess individually the receivables to determine whether
- 'er they are considered credit-impaired. In this stage, the
be effective interest rate is calculated based on the
-:-its receivable balance, net of any related allowance.

The ECL Model under IFRS 9 involves the exercise of the

significant management judgment. Key areas of judgment include
credit risk exposures, determining method to estimate ECL, defining
:he default, identifying exposures with significant deterioration in credit
quality, and incorporating forward-looking information in calculating
ECL.
]S t
an In stage 1, an entity measures expected credit losses ariSing
from possible default events within twelve months after the reporting
period. Based on published financial statements of entities that apply
the requirements of IFRS 9 in their financial statements for the year
2018, stage 1 is comprised of all non-impaired financial assets which
have not experienced signilicant increase in credit losses (SICL) since
..:
f- '-ro
initial recognition.
I
i-d Stage 2 shall be applied if the credit risk increases significantly
for financial assets. If contractual payments are more than the
F-rr"
specified past due thresholds, depending on the credit terms of the
instrument, it may be considered that there is significant increase in
Fji credit risk. The estimation of expected credit losses may be based on
individual basis, or on a collective basis for portfolios with similar credit
risk characteristics. Regardless of the way in which an entity assesses
significant increases in credit risk, there is a rebuttable presumption
that the credit risk on a financial asset has increased significantly since
a-ce initial recognition when contractual payments are more than thirty (30)
-:h days past due (par. 5.5.11 IFRS 9).
-ot
.:it In stage 1 and 2, the entity sets up the required allowance,
based on its developed model, using variables considered appropriate,
to measure the expected credit losses. The entity prepares the same
entry to record bad debts expense or impairment loss, charging an
expense account and crediting the allowance for uncollectible
receivables.
97
I
 Chaater 2 - Recehtables

' Stage 3 shall be applied for financial assets that are credit-
impaired.

IFRS 9 requires an entity to closely monitor the status of each

portfolio of financial assets. Entities, specifically banks, may adopt
their own model(s) in determining whether an instrument is credit-
impaired.

IFRS 9 enumerates events that indicate that a financial asset is

credit impaired. Such events include (Appendix A, IFRS 9)

o significant financial difficulty of the borrower;

r a breach of contract, such as default or delinquency;
o grant by the holder (the entity holding the financial asset) of
concession to the issuer that the former would not otherwise
grant under normal circumstances;
r probability that the borrower will enter bankruptcy proceedings
or financial reorganization; and
. for securities that were previously traded, the disappearance of
an active market.

.In stage 3, the entity shall measure the impairment loss on

individual receivables as the excess of the receivable's carrying amount
(net of the loss allowance or allowance for uncollectible accounts) over
the present value of the estimated future cash flows discounted at the
historical or original effective interest rate.

The illustrations that follow attempt to illustrate the above

principles under stage 3.

Case A

The ABC Company's ledger balance for Notes Receivable

includes a note receivable from Company A. Company A is undergoing
bankruptcy proceedings and has negotiated for restructuring of its note,
with face amount of P4,O0O,0OO, and accrued interest of P480,000,
based on interest rate of L2o/o. The note is due on this date, December
31,2O2O. The restructuring arrangement calls for Pl,12O,OOO annual
payment with first payment due on December 31, 2021. No further
interest will be collected during the extended four-year term. Based on
the ledger balance of the company for allowance for expected credit loss,
P10O,000 relates to this note, after previously applying stages I and 2
for estimation of ECL.

Principal and accrued interest

(P4,000,000 + P480,000) P4,480,O00
Allowance for Expected Credit Loss (100,000)

98
 Chapter 2 - Receluables

Present value of future cash inflows

P1,120,000 x 3.0373 3,401.776
Additional Impairment loss P 978.224
ABC Company shall prepare this entry on December 31, 2O2O to
recognize the impairment.

Impairmenl loss - flofes Receiuable 97g,224

[: Allowance for Expected Credit Loss IOO,OOO
Restructured Notes Receiuable 4,480,000
Discount on Restructured Notes Receiuable 1,078,224
Ifofes Receiuable 4,OOO,OOO
Interest Receiuable 4$O,OOO

The subsequent collection of the note on December 31, 202 1 is

recorded as follows:
E-:
Cash 1,12O,OOO
Dscount on Restrudured Notes Receiuable 4OB,21S
Restructured Notes Receiuable 1,12O,OOO
Interest Reuenue 4Og, 123

similar entries sha-ll be made on December 31, 2022,2023 and

2024. The interest revenue that is recognized is already based on the
net amount of the receivable, after setting off the related allowance and
reducing the receivable to the present value of modified cash flows
(stage 3).

Take note that the totat impairment recognized. on this receivable

is P\,o78,224, P100,000 of which was previously recognized. on stage 1
or stage 2.

p' The recognition of interest revenue shall be based on the

arnortization table presented below.
I
Amortization Table - Restructured Notes Receivable
Periodic Payment Applied To Balance of
Date Payment Interest Principal Principal
t Dec. 3l,2Ol9 3,4O1,776
Dec.3l,2O2O 1,120,0O0 408,2t3 7ll,7g7 2,6g9,ggg
Dec.3l,2O2l 1,120,000 322,799 797,2A1 1,892,799
Dec.3l,2022 1,120,000 227,t35 892,965 ggg,g23
Dec. 31,2023 1,120,O00 t20,o77* 999,923
*Adjusted; the difference is due to rounding
off.

99
<r-F

Chapter 2 - Receiaables

Case B

On December 31, 2019, XYZ had a note receivable from

company B with face va_lue of P1,000,000 and interest receivable of
P12O,OO0, based on 72o/o intetest rate. No impairment loss was
previously recognized on this note, as XYZ did not anticipate any credit
loss during the last twelve months on this receivable. The note is
already due on December 3l , 201.9. ComSiany B recently suffered an
uninsured catastrophe and is now in financial difficulty. XYZ agreed to
extend the maturity date of the principal (P1,0OO,0OO) by two years'
The interest of P120,000 is to be collected on this date, but interest
during the extended period is reduced ftom l2oh to lOoh.

Carrying value P1,000,000

Present va-lue of future cash inflows
P1,000,000 x.7972 P797,2OO
P100,000 x 1.6901 169.010 966 210
Impairment Loss _t-__33f29_
XYZ $nall prepare the following entries on December 31, 2Ol9:

Cash 120,000
Interest Receiuable 120,000

Impairment -Loss - Receiuables 33,790

Restructured Notes Receiuable 1,000,000
Notes Receiuable 1,000,000
Discount on Restructured Notes Receiuable 33,790

Amortization Table
Nominal Effective Discount Amortized
Date Interest Interest Amortization Cos end
Dec.31,2019 96 2ro
Dec.31,2O2O 100,000 115,945 15,945 982 155
Dec.3l,2O2l 100,000 117,845* 17,845 1 000 000
*Adjusted; the difference is due to rounding off.

XYZ shall prepare the following entries on December 31, 2O2O

and December 31, 2O2l:
2020
Dec.31 Cash 10O,0OO
Discount on Resiructured Notes Receiuoble 15,945
Interest Reuenue 115,945

100

rItIIt',flIUUl'It

ilil
 Chapter 2 - Receiaables

2021
Dec. 31 Cash 1,1OO,OOO
Discount on Restructured. Notes Receiuable 17,845
r -,-
Interest Reuenue 117,845
lr, Restructured Notes Receiuable 1,OOO,OO0

[, '
The following, in diagram format, presents the two models for
measuring and assessing expected credit loss under IFRS 9, Reuenue
[, from Contracts tuith Customers.

[, Trade Trade
Receivables with Receivables with Lease
Significant No Significant Receivables
Financing Financing Arising from
Component Component from IFRS 16
(SFC) from IFRS IFRS 15
15

Choice
based on
accounting
policy

General Approach Simplified Approach

Figlre 2.2
Models for Measuring and Assessing
Expected Credit Loss (ECL)
General Approach and Simplified Approach

_0

101
Clu.pter 2'Recehnbtes
summarized below:
The ECL Modei under IFRS 9 is

APP1Y Stage 1

Financial Assets Measure exPected credit loss

(FA) that are not (ECL) through a loss allowance
credit- imPaired ir.sed o, . i2-month Period
and with no Interest is based on gross
signi{icant carrying amount of the
increase in credit receivables
risk (SICR)

APPIY Stage 2
Measure lifetime ECL through a
FA that are not loss allowance
credit-imPaired Interest is based on gross
but with SICR carrying amount of the
receivables

APPIY Stage 3
Assess individuallY the
receivables
to determine whether credit-
FA that are credit- impaired
impaired Effective interest rate is used
based on the receivable
balance net of anY related
allowance

Figure 2'3
an!
-ilpectedof Measuring
General Approach -llcognizing
Credit Losses tECLf

Simplified Approach
Illustration of Accounting for ECL under
the following ledger
On December 31, 2O2O' DEF showed
balances: P4,000,000
Accounts Receivable 120,ooo
A11o*.rr". for Expected Credit Loss2

account title Allowance for Uncollectible

2 An entity may still use the traditional
Accounts.
to2
 Chaoter 2 - Receioables

Basedonlifetimeexpectedcreditlossesthatconsiderfactors
the entity's
such as industry specilic ,rtd *""to-economic variables,grouping
is best measured by the
management assessls that the ECL
receivables according to age.

An aging of accounts receivable indicates the following:

ts.-e
Aee classification Balance Probabilitv of non-collection
P2,8OO,OO0 2o/o
Less than 3O daYs
31-90 days 700,ooo 1Oo/o

300,ooo 2Oo/o
91-120 days
200,000 3jo/o
More than 120 daYs

Based on assessment of expected credit loss' DEF determined

that P2O,O00 of accounts in the age category "more-than 120 days"
are
written off' The 3oo/o provision
believed io be uncollectible and should be
fornon-collectabilityshallbeappliedontheremainingaccountsinthe
same age category.

Based on the assessment of expected credit loss, the required

allowanceandtheimpairmentlosstoberecognizedontheaccounts
receivable are computed as follows:

2,80O,OOO x 27o P 56,000

7O0,OOO x lOo/o 70,ooo
300,OOO x2Oo/o
60,000
18O,O0O x3Ooh
54,O00
Total required allowance P 240,OOO
Less: existing allowance (120,000 - 20,000) 100,000
Additional impairment loss recognized P-l4opao

DEF shall prepare the following entries on December 31' 2O2O:

Alloutance for Expected Credit Loss 20,ooo

Accounts Receiuable 20,000

Impairment .Loss. Accounts Receiuable 140,000

Altoutance for Expected Credit Loss 140,OOO

DEF's accounts receivable on its December 37,2O2O statement

minus
of financial position shall be reported atP3,740,OO0 (P3'980'0OO
P24O,O0O).

IFRSgstatesthatthereisrebuttablepresumptionthatthereis
increase in the credit risk for a financial asset, once it becomes
overdue
be in the above example, the
for more than 30 days. As can observed
older is the age of tire receivable, the higher is its credit risk
and the
higher is the probability that it may not be collected'
1(}3
 Chapter 2 - Receiaables

Groupings based on some other similar characteristics may also

be used as a model in ECL. Factors such as the industry to which the
customer belongs, the geographical location of the customer and trade
regulations may also be considered in estimating ECL.

RECEIVABLE FINANCING

Companies requiring cash to finance its operational needs may

find it necessary or desirable to accelerate cash inflows from receivables
by either selling its receivables or using them as collateral for loan
arrangernents.

The transfer of receivables to another party to obtain cash may

or may not require derecognition of receivables. The transferor of the
receivable shall evaluate whether or not it has transferred substantially
all the risks and rewards of ownership of the financial asset. (see
Figure 2.2 overleafi

Various types of arrangements may be used to secure immediate

cash from receivables even before their maturity dates. If the risks
and rewards of ownership from the receivables are not substantially
transferred, the transfer is recorded as secured borrowing; otherwise,
the transaction is recorded as a derecognition of the receivable,
recognizing either gain or loss.

Secured Borrowing
a. Pledging
b. Assignment
c. Discounting of notes receivable with recourse

II. Sale of Receivables

a. Discounting of notes receivable without recourse
b. Factoring

The types of arrangements using receivables (both notes and

accounts receivable) as immediate sources of cash are shown in Figure
2.4 overleaf.

104
 Chapter 2 - Receiuables

Transfer of
receivables

Substantial transfer
of risks and rewards?
rS
:11
Yes No

ii-

Derecognize Retain the asset in

the asset and record the books and record
gain or loss the transaction as a
secured
e
:.S
Figure 2.4
i' T54pes of Arrangements Using Receivables
as an Immediate Source of Cash

Pledging

Pledging refers to the use of receivables as collateral for a loan.

It is otherwise known as general assignment of accounts receivable,
since a1l receivables are use.d as collateral for a loan. A pledge of
accounts receivable involves no special accounting problems' The only
entry required in the books would record the loan obtained from the
finance company or bank by debiting Cash (and Discount on notes
payable or Interest expense, if discounted) and crediting Notes Payable
for the amount of the loan. The accounts receivable balance is not, in
:-d
any manner, affected by the pledging.
-:e
If at the reporting date, there is still a financial liability that is
secured by receivables, an entity shall disclose the carrying amount of
the receivables pledged as collateral for the loan and the significant
terms and conditions relating to the pledge.

To illustrate, assume that on December 1, 2O2O, ABC

Manufacturing borrowed P500,000 from Manila Bank by issuing a one-
year note, which the bank discounted at l2oh. Accounts receivable
totaling Pl,200,000 are pledged to secure the loan. Entries relating to

105
r

Clwpter 2 - Receiuables

the notes payable, including year-end adjustments follow (assume the

company uses a calendar year as its accounting year.)

2020
Dec. 1 Cash 440,000
Dscount on Notes Pagable 60,000
-lVofes Pagable - Bank 500,ooo
Dis count e d note s p ag able

31 Interest Expense 5,000

Discount on Notes Pagable 5,OOO
Amortization of discountfor one
month (60,000 x 1/ 12)

No entry is made in the books pertaining to the pledged

accounts. However, a disclosure thereof is required in the notes to
financial statements.

The adjustment in the amount of the allowance may not

necessarily result in the recognition of a loss. In instances, when the
allowance is required to be decreased, the adjustment requires the
reversal of a previously recorded impairment loss, resulting in a
recognized gain in profit or loss.

Assignment of Accounts Receivable

Assignment of accounts receivable is a more formal borrowing

arrangement in which specific receivables are identified and used as
security for a loan. This is also known as specific assignment of
accounts receivable. The borrower (assignor) pledges the specifically
described receivables to a lender (assignee) and signs a promissory note.
The assignor retains the credit risks and continues collection efforts. In
most cases, customers are not notified of the assignment and they make
pa5rments directly to the assignor (non-notification basis) and the
assignor remits the collection to the assignee.

In disclosing the specifically assigned accounts receivable, the

assignor should report them as part of accounts receivable with a
disclosure of the amount assigned. Similar to general assignment of
accounts receivable, any significant terms and conditions relating to the
assignment should be disclosed.

To illustrate, assume the following transactions for ABC

Manufacturing during 2O2O.

106
 Chaoter 2 - Recehtables

ABC Manufacturing entered into an assignment arrangement

with Easy Finance Company whereby the assignee would advance 8O7o
of all accounts assigned less a P2,0OO service charge. During the year,
P400,000 of accounts receivable were assigned; P25O,OOO collections
were made on outstanding accounts which were remitted to Easy
_l
Finance Company to apply first to P3,500 interest and the balance to
principal. Sales returns and allowances on assigned accounts
amounted to P5,000.

'l The journal entries to record the foregoing are as follows:

Accounts Receiuable Assigned 40O,O0O

Accounts Receiuable 400,000
u, As sig ne d sp e cific re ceiu able s

Cash 318,000
Finance Charges 2,000
- _t lVotes Pagable - Finance Compang 320,OOO
Loan from the ftnance companA
--3
f
Cash 250,OOO
Accounts Receiuable Assigned 250,000
Collection of assigned accounts

lVofes Pagable - Finance Compang 246,500

Interest Expense 3,50,0
Cash 250,000

I
Remittance to finance compang

Sales Returns and Allousances 5,000

Accounts Receiuable As signed 5,OOO
Sales retums and allouances

. The entry at the date of the assignment debiting Accounts

Receivable Assigned and crediting Accounts Receivable does not affect
the total balance of Accounts Receivable. The entry merely discloses the
amount of Accounts Receivable that has been assigned.

At the end of the year, accounts receivable assigned in the

amount of P145,000 is included in the one-line caption Trade and Other
Receivables under current assets. On the other hand, Notes Payable -
Finance Company balance is reported under current liabilities. In the
notes to the financial statements, the company should disclose its
equity in assigned accounts for the net amount of P7 1,500 (Accounts
receivable assigned balance, P145,000 less notes payable to finance
company balance, P73,5OO).

to7
 Chapter 2 - Receiuables

Assume that during the yeat 2021, PIOO,OOO of the assigned

accounts were collected and that the balance due and additional
interest charge of P935 were remitted to the finance company. The
entries are:

Cash 100,ooo
Accounts Receiu able As signe d 140,000
Collection of assigned accounts

lVofes Pagable - Finance Compang 73,5AO

Interest Expense 935
Cash 74,435
Final pagment to the bank

After the final settlement with the finance compa.ny, the balance
of Accounts Receivable Assigned shall be reverted to Accounts
Receivable, with the following entry:

Accounts Receiuable 45,000

Accounts Receiu able As signe d 45,OOO
Reuerted the remaining assigned
accounts to accounts receiuable

In some instances, the customers are instructed to make

payments to the assignee (notification basis), and the assignee informs
the assignor of the amount collected. In such cases, the finance
company applies the amount collected from customers to the payment
of loan and interest. collection in excess of the balance of the loan and.
interest shall be remitted to the assignor.

To illustrate, assume the same information for ABC

Manufacturing Company, except that the assignment is made on a
notification basis. The Easy Finance company makes collections from
the customers and applies the amount collected to interest and
principal of the loan. The following entries would be made by ABC
Manufacturing Company.

Accounts Receiu able As signed 400,000

Accounts Receiuable 400,000
As sig ne d s p e cific r e ceiu able s

Cash 31B,OOO
Finance Charges 2,000
Notes Pagable - Finance Compang 320,000
Loanfrom the finance companA

108
 Chapter 2 - Receitnbles

Ui'.d JVofes Pagable - Finance Compang 246,500

t -. a-l Interest Bxpense 3,500
--e Accounts Receiu able As signed 250,000
Collection of assigned accounts
bg ftnance companA

.0 Sales Retum,s and AllouLances 5,O00

Aecounts Re ceiu able As signed 5,000
Sales returns and alloutances

At year-end, the sarne accounts would be shown by ABC

-) Manufacturing Company: Accounts Receivable Assigned of P145,O00 is
reported among the entity's accounts receivable and Notes Payable -
Finance Company of P73,500 is reported among its current liabilities.
p' : The notes to the financial statements would disclose the entity's equity
h.. in assigned accounts amounting to P7 1,500.
The subsequent collection of P100,000 exceeds the interest
charge of P935 and loan balance of P73,500. The excess amount of
.0 P25,565 is received from the finance company in final settlement of the
borrowing arr€rngement. The following are the appropriate entries made
by ABC Manufacturing Company.

lVotes Pagable - Finance Compang 73,500

Interest Expense 935
Cash 25,565
Accounts Receiuable As signed 100,000
' Collection of assigned accounts

Accounts Receiuable 45,000

Accounts Receiu able As signed 45,OOO
Reuerted th.e remaining assigned
accounts to accounts receiuable

Discounting of Notes Receivable

By discounting a note receivable, an entity is endorsing a
promissory note to a bank or a financing company, the latter advancing
the maturity value of the note less a charge called discount. A company
that discounts a customer's note receivable at the bank is in essence
selling the note to the bank with recourse obligation. Because the
endorsing company still has a continuing involvement on the
discounted note, the transaction does not quali$ for derecognition of
receivable.

1()9
 Chapter 2 - Receiuables

The following terms and computations are necessa4l relating to

discounting of notes receivable.

1 Principal is the amount stated on the face of the note, also called
the face value.

2 Interest is the amount of interest for the entire term of note,

computed as: Principal x Interest rate x Term.
3. Maturit5r date is the date when the note is due and payable

4. Maturity value is the total amount due on the note at maturity

date, computed as principal plus interest. If the note is non-
interest bearing, then its maturity value is equal to its principal
or face value.

5 Discount rate is the rate of interest used by bank in computing

discount.

6 Discount period is the period of time remaining on the term of

the note; meaning, the period from the date of discounting to
maturity date.

Discount is the amount of interest earned by the bank,

computed as: Maturity value x Bank discount rate x Discount
period.

8. Proceeds is the discounted value of the note received by the

endorser of the note from the bank, computed as:

Proceeds : Maturit5r value - Discount

To illustrate, assume that on December 21, 2O2O, AEIC

Marrufacturing discounted the 6o-day, l5o/o, P8OO,O00 note from
Customer F at National Bank. The note is dated December 1 and the
bank's discount rate is 187o. Computations and entries pertaining to
the note discounted a-re as follows (assume a 360-day year):

Principal P800,000
Add: Interest (P8OO,O00 x 15% x 60/360) 20.000
Maturity Value P820,OOO
[,ess: Discount (P820,000 x l8o/o x 40 /360) 16,400
Proceeds P803.600

ABC Manufacturing shall prepare this entry on the date of

discounting.

110
 Chaoter 2 - Receioables

F- to Dec. 21 Cash 803,600

Liabilitg on Discounted Notes 803,600

h-ed The credit to the liability account indicates that the note is
discounted with recourse, and ABC Company is still liable to the
financing company for the note, in case the maker fails to pay it on
maturity date. Hence, the transfer is not treated as derecognition,
since the company guarantees to compensate the financial institution
for credit losses that maY occur.

If the company adopts the calendar year as its reporting period,

adjustments sha1l be made at year-end to accrue the interest earned on
the notes receivable and the interest incurred on the discounted notes.
2020
Dec.31 Interest Receiuable 10,000
H Interest Reuenue
8O0,0OO x 75o/o x 30/ 360
10,000

Dec.31 Interest Eryense 4,100 I

KI Interest Pagable
16,400 x 1O/40
4,100

The accrued interest on the notes receivable runs from the date
F_. of the note (December 1) up to the end of the reporting period. The
b'-:.t
debit to interest expense is the €unount of discount allocated to the
period from the date of discounting (December 2l) up to the end of the
reporting period.

Assuming that the note matures without notice of protest, ABC

Manufacturing shall cancel both the assets (Notes Receivable and
Interest Receivable) and the liability (Liability on Discounted Notes) in
its books, with the following entry:
2021
Jan.3O Liabilitg on Discounted Notes 803,600
I'l 12,300
Interest Expense (16,400 - 4,10O)
Interest Pagable* 4,100
Interest Receiuable 10,ooo
lur Interest Reuenue 70,000
Lr lVofes Receiuable 800,ooo
L

*assumes that no reversing entry was made on Januaql l,2O2O.

h:
Additional interest expense and interest revenue are recognized
from Jaluary 1 to JanuaSr 3O (based on the remaining number of days
in the discount period).

111
 Chapter 2 - Receiuables

When Customer F fails to pay on maturity date, ABC

Manufacturing wilL be obliged to pay the maturity value of the note plus
protest fees and other bank charges. The total amount paid by ABC on
account of the discounted note is to be charged to the account of the
maker of the note. Assuming that in the foregoing example the bank
charged protest fees and other charges of p5,o0o, ABC wili prepare the
following entries:
2021
Jan.3O Liabilitg on Discounted Notes 803,600
Interest Expense (16,400 - 4,100) 12,300
Interest Pagable 4,1OO
Interest Receiuable 10,000
Interest Reuenue 10,ooo
lVotes Receiuable 800,000
Accounts Receiuable 825,OOO
Cash 825,OOO
Pagment of the matuitg ualue
and protest fees to the bank

Discounting of Notes Receivable without Recourse

If discounting of a note is on a without recourse basis, the

endorser is relieved of the responsibility for the note that is dishonored
on maturity. The discounting is, therefore, treated as a sale and the
note would qualift for derecognition. In such a case, no liability on
discounted note is recorded by the seller, and the entries, in- the
previous example would be modified as follows:

2020
Dec. 21 Interest Receiuable 6,667
Interest Reuenue 6,667
BOO,OOO x 15o/o x 2O/ 36O
Dec.21 Cash 803,600
,Loss on Sale of Notes Receiuable 3,067
-lfofes Receiuable 800,ooo
Interest Receiuable 6,667
Sale of notes receiuable

tr'actoring

Factoring is the transfer of receivables without recourse, and is,

therefore, an outright sale of receivables. The factor company (finance
company) assumes the risk of collection and generally handles the
billing and collection function. As in any sale of aisets, a gain or loss is
tL2
 Cho;pter 2 - Receittobles

3C recognized for the difference between the proceeds received and the net
i 'ls carrying amount of the receivables factored.
ln
-.:1e If the factor retains a portion of the purchase price to cover
- -1- probable sales discounts, returns, and allowances (called factor's
uReceivable from Factor"
1e holdback) such amount is charged to a
account. Subsequent discounts, returns and allowances are credited to
this account. The final settlement of the factor's holdback is made
after the factored receivables have been fully collected.

To illustrate, assume that during December, ABC Manufacturing

sold goods priced at P200,000 with credit terms of n/30. These were
) immediately factored to a finance company. The factoring fee was 1O7o
) of the receivables purchased. The factor's holdback is 5% of the
) purchase price. The entry to record the factoring is as follows:

Cash 171,OOO
) Lossfrom Factoing 20,000
Receiuable from Factor 9,000
Accounts Receiuable 200,o00

Gross amount of receivables factored P200,000

Less: Factoring fee (10% x 200,000) P20,OOO
Factor's holdback (Soh x 18O,OOO) 9,000 29.O00
1e Net cash received from factoring P171.000
:d
--e when customers whose accounts were factored make returns,
,n the transaction is recorded as
:e
Sales Returns and Allou,tances xx
Receiuable from Factor xx

when all the receivables factored are collected and no returns,

discounts or allowances are a11owed, final settlement with the factor is
recorded as

Cash g,oo0
Receiuable from Factor 9,000

DISCLOSURE REQUIREMENTS
1 An entity shall disclose the following in its financial statements
(based on IFRS 7 Financial Instruments: Disclosures):

(a) information that enables users of its f,tnancial statements

to evaluate the significance of receivables for its financial
position and performance, including significant terms
113
 Chapter 2 - Receiua.bles

and conditions that may affect the amount, timing, and

certainty of future cash flows;

(b) the accounting policy and method adopted including the

criteria for recognition and the basis of measurement
applied;

(c) information about its exposure to credit risk including

the amount that best represents its maximum credit risk
exposure at the end of the reporting period, without
taking account of the fair value of any collateral, in the
event of other parties failing to perform their obligations
and including significant concentrations of credit risks;
and

(d) information about its exposure to interest rate risk

including contractual repricing or matrrrity date
whichever dates are earlier and including effective
interest rates, when applicable.

2 For accounts receivable pledged or assigned and notes receivable

discounted, the entity shall disclose the following:
(a) the nature of the risks and reward.s of ownership to
which the entity remains exposed;

(b) the carrying amount of financial assets it has pledged as

collateral for liabilities or contingent liabilities; and

(c) the terms and conditions relating to its pledge.

3 When an entity holds tollateral and is permitted to sell or re-

pledge the coliateral in the absence of default by the owner of the
collateral, it shall disclose:

(a) the fair value of the collateral held;

(b) the fair value of any such collateral sold or re-pledged,

and whether the entity has an obligation to return it; and

(c) the terms and conditions associated with the use of the
collateral.

4 An entity sha-ll disclose material items of income and expense,

and gains and losses resulting from receivables. For this
purpose, the disclosure shall include at least, the following
items:

114
 Chapter 2 - Recetuables

(a) total interest income, calculated using the effective

and interest method and

(b) the amount of interest income accrued on impaired

the receivables

5 An entity shall disclose the nature and amount of any

impairment loss recognized in profit or loss (Bad Debts
ling Expense). When receivables are impaired by credit losses and
isk the entity records the impairment in a separate account
out (allowance account) to record individual impairments of a similar
the account used to record a collective impairment rather than
0ns directly reducing the carrying amount of the asset, it shall
- SKS; disclose a reconciliation of changes in that account during the
period

:tsk Shown below are sample disclosures relating to receivables in a

:ate company's notes to financial statements.
" -ive

From Notes to Financial Statements of Fictitious Company for the year

isle 2020:
Accounts Receivable
to
Accounts receivable are carried at the original amount due from customers, which is
considered to be fair value, less allowances for doubtful dccounts. Allowance for
[- as doubtful accounts is based on a periodic review and aging of all outstanding accounts,
considering an analysis of historical bad debt, customer credit worthiness, current
economic trends and changes in our customer payment terms. Bad debts are written off
when proved to be uncollectible.

:e- Customer financing

ile
Fictitious Company has a limited number of customer financing arrangements and
agreed extended payment terms with few selected customers. Reassessment of final
collectability of credits are made when the actual financial position of the debtors
materially dffir from assumption or when there are changes in the general economic
conditions.
d,

Allowances for doubtful accounts

l --.e Fictitious Company maintains allowqnces for doubtful accounts for probable losses
resulting from the inability of customers to make payments when the accounts are due.
If the financial conditions of customers increasingly deteriorate, and the ability of the
cuslomers to make payment becomes probable, additional allowances may be required
i-r
t-- infuture periods.
F-g

115
 Chapter 2 - Recefumbles

The following disclosures are from the published financial statements of Fictitious
Company for 2020.

Trade and other receivables (In millions of PHP)

2020 2019
Tradeandotherreceivable,s 12123 18987
Other receivables 2 542 5 432
9 581 13 5ss
Past due and impaired receivables (In millions of PHP)
2020 2019
Not past due 9 326 15 512
Past due l-j1 days 1 229 946
Past due 3l - 60 days 8s3 883
Past due 61 - 90 days I t0 521
Past due 9l - 120 days 190 707
Past due more than 120 days 797 967
Allowance for doubtful receivables (382) ( s49)
12,123 1B 987

Based on the historic trend and expected performdnce of the customers, the company
believes that the above allowance for doubtful receivables sfficiently covers the risk of
default.

116
 Cltapter 2 - Receiua.bles

_ous KEY TERMS USED IN THIS CHAPTER

l2-month expected credit loss. The portion of lifetime expected credit

losses that represent the expected credit losses that result from
default events on a linancial instrument that are possible within the
12 months after the reporting date. (Appendix, IFRS 9).
Accounts receivable. Trade receivables that are not evidenced by a
formal agreement or note. Accounts receivable are usually
unsecured open accounts.
Aging of receivables. Method for establishing an allowance for
uncollectible accounts based on outstanding receivables. This
involves analyzing individual accounts to determine those not yet
due and those past due. Past due accounts are classified in terms
of length of the period past due.
Amortized cost. The amount at which the financial asset or financial
liability is measured at initial recognition minus principal
repayments, plus or minus the cumulative amortization using the
effective interest method of any difference between that initial
tny amount and the maturity amount, and minus any reduction
.. of (directly or through the use of an allowance account) for impairment
or uncollectibility.
Assignment of accounts receivable. A formal borrowing arrangement
in which specilic accounts receivable are used as security for a
promissory note.
Cash discount. An incentive for early payment of amounts owing on
credit transactions, normally quoted as a percentage. This is also
called settlement discount.
Credit loss. The difference between contractual cash flows that are
due to the entity in accordance with the contract and all the cash
flows that the entity expects to receive discounted at the original
effective interest rate (or credit-adjusted effective interest rate for
purchased or originated credit-impaired financial assets (Appendix
A, IFRS 9).
Credit risk. The risk that the payee of the debt instrument will not be
able to comply with the obligations in accordance with the agreed
terms.
Disclosure. Information reported either on the face or in the notes to
the financial statements.
Discount. The amount of interest earned by the bank computed as
maturity value x bank discount rate x discount period.
Discounting of note receivable. Receiving cash from a financial
institution in exchange for a note receivable endorsed before
maturity the maturity date.
Discount rate. The rate of interest used by a bank in computing
discount.
Discount period. The period of time remaining on the term of the
note. It is the period from the date of discounting to maturity date.
tt7
 Chapter 2 - Recehnbles

Efreetive interest method. An amortization method that provides for

recognition of an equal rate of amortization of premium or discount
each period. It uses a constant interest rate times a changing
investment balance.
Factoring. sale of receivables without recourse for cash to a third
party, usually a bank or other financial institution.
Generd assignment of accounts receivable. The borrowing of money
with receivables pledged as securit5r on the loan. It is practically thl
same as pledging of accounts receivable.
Impairment loss. This is the amount by which the carrying amount of
an asset exceeds its recoverable amount.
Interest. This represents an amount paid on the note over and above
the principal. It is computed as principal x interest rate x term.
Interest-bearing note. It is a note that provides for the payment of
interest for the period between the issuance date and the due date.
Lifetime expected credit losses. The expected credit losses that
result from all possible default events over the expected life of a
financial instrument (Appendix, IFRS 9).
Maturity date. The date when the note is due and payable.
Maturity value. The total amount due on the note at maturity date. It
is the sum of the principal and interest.
Non-trade receivables. Any receivables arising from transactions that
are not directly associated with the normal operating activities of a
business.
Non-interest bearing note. A note that makes no provision for
interest on its face; also cafled zero-interest bearing note.
Normal operating cycle. It is the time period between the acquisition
of materials entering into a process (or the purchase of goods for
resale) and its realization in cash or an instrument that is readily
convertible into cash.
Notes receivable. Formal claims against another that is evidenced by
a written promise called promissory note.
Principal. The amount stated on the face of the note. This is also
called face value.
Proceeds. The discounted value of the note received by the endorser
of the note from the bank, computed. as maturity value less
discount.
Promissory note. An uncond.itional written agreement to pay a
certain sum of money on a specific or d.eterminJrte date to order of
the payee or to bearer.
Receivables. claims against third parties that will be settled by
receipt of cash.
Trade discount. A reduction in the list price of an item to determine
the amount actually chargeable to the customer. Generally, trade
discounts are dependent on the volume of business or size Lf order
from the customer.
Trade receivables. Receivables associated with the normal operating
activities of a business such as credit sales of good.s or services.
118

I
 Chapter 2 - Receitables

: for CHAPTER SUMMARY

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{. Receivables are claims that are expected to be settled by receipt
of money.

tr :1ey * As to source, receivables are classified either as trade receivables

t rhe or non-trade receivables. Trade receivables arise from sale of
goods or services in the normal course of business. A1l other
--=-i of receivables are classified as non-trade.

?ve * In a properly classified statement of financial position, trade

receivables are generally classified as current assets; however,
:of any portion not collectible within twelve months from the
reporting date should be disclosed. Non-trade receivables are
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classified as current assets only when expected to be collected
::a within twelve months from the reporting date. Otherwise, they
are classified as non-current.

It * Trade receivables are initially recognized simultaneous to

recognition of related revenues. They are initially measured at
.lat transaction price. Trade discounts are netted against the
a recorded receivables, while cash discounts may be recorded
either when the cash discount is taken (gross price method), or
1 :Or when it is not taken (net price method), or when it is offered
(allowance method).
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:or a Loans and receivables are measured in the statement of financial
i1v position at atnortized cost. Allowance for sales discounts, sales
returns and uncollectible accounts and similar accounts
by recognized as a result of impairment of receivables as well as
unearned finance charges (or discount on notes receivable)
.so reduce the gross amount of receivables to amortized cost.
Consequently, any unamortized premium on notes receivable
-)ef (which results when the stated interest on the face of the note is
:SS significantly greater than the prevailing interest rate on the date
of the receipt of the note) is added to the notes receivable
a account to arrive at the receivable's amortized cost.
of
*' Iinpairment loss is recognized in profit or loss, based on 12-
h ry month expected credit losses, or when the credit risk increases
from the date of initial recognition, based on lifetime credit
losses, under stages 1 and 2, respectively. When receivable is
.le assessed to be credit-impaired, stage 3 is applied and
er impairment loss is recognized based on the net carrying amount
of the receivable, after considering the previously recorded loss
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allowance. However, for trade receivables and receivables with

119
Chapter 2 - Receiuables

no significant financing component recognized. under IFRS 15,

an entity has to apply the simplified approach that considers the
lifetime expected credit loss.

t Receivables denominated in foreign currency should be

translated in the statement of financial position using the
exchange rate at the end of the reporting period.

{. Receivables may be used by an enterprise to obtain cash even

before their maturity dates. The total accounts receivable may
be used as collateral for a loan (pledging) or specific accounts
receivable may be specifically segregated as collateral for a loan
(specific assignment of accounts receivable). In either case, the
amount of receivable pledged should be disclosed in the financial
statements. Accounts receivables may also be sold outright to a
factor (factoring), or customers, notes may be. endorsed to a
financing company, the financing company advancing the
maturity value less discount (discounting). In determining
whether the transferred receivable shall be derecognized, the
enterprise has to assess whether it has transferred substantiaily
the risks and rewards to the recipient. If the enterprise has
transferred substantia-lly the risks and reward.s, the transaction
is considered a sale and gain or loss is recognized upon transfer;
otherwise, the receivable is retained in the books of the
transferor and the transaction is accounted for as a secured
borrowing only.

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