RECEIVABLES

I.

Concept of receivables
a. Are financial assets as defined in PAS 32
b. Financial asset held within a business model whose objective is to hold financial
assets in order to collect contractual cash flows and the contractual terms of the
financial asset give rise on specified dates to cash flows that are solely payments
of principal and interest on the principal amount outstanding (IFRS 9)

II. Balance Sheet Classification

a. Current
i. Trade receivables collectible within 1 yr or normal operating cycle,
whichever is longer
ii. Non-trade receivables collectible within 1 yr
b. Non-current
Note: customers with credit balances current liabilities and not offset against
debit balances in other customers accounts, unless immaterial
Examples of non-trade receivables
Advances to or receivables from employees and DOSRI (directors, officers,
stockholders, related interests)
Advances to affiliates usually considered long-term investments
Subscriptions receivable current if collectible within one year;
otherwise, deduction from subscribed capital stock
Creditors accounts with debit balances current; if not material, may be
offset
Claims receivable (insurance companies, BIR) usually current
III. Balance Sheet Presentation
a. Current usually as one item, net of ADA; breakdown is shown in the notes
b. Non-current either as long-term investments or other noncurrent assets
IV. Measurement
a. Initial
i. General rule fair value plus or minus transaction costs that are directly
attributable to the acquisition or issue of the financial asset
ii. Trade receivables transaction price (as defined in IFRS 15) if the trade
receivables do not contain a significant financing component in accordance
with IFRS 15 (or when the entity applies the practical expedient in
accordance with paragraph 63 of IFRS 15)
Transaction price - The amount of consideration to which an entity
expects to be entitled in exchange for transferring promised goods or
services to a customer, excluding amounts collected on behalf of third
parties.
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b. Subsequent measurement
i. For non-interest bearing long-term receivables amortized cost
using effective interest method
ii. Long-term receivables are written down (directly or through an
allowance account, Allowance for expected credit losses) if impaired:
Credit risk has increased significantly since initial recognition
lifetime expected credit losses
Credit risk has not increased significantly since initial
recognition 12-month expected credit losses
iii. For accounts receivable at net realizable value; i.e., gross
amount less the following allowances: allowance for freight charge,
allowance for sales return, allowance for sales discount, and
allowance for expected credit losses (i.e. lifetime, in accordance
with IFRS 9)

V. Sales Returns and Allowances

a. For proper matching, an allowance for sales returns is set up at the end of
the period for sales of the year.
b. Journal entry
Sales Return
xx
Allowance for sales return

xx

This entry is usually reversed at the beginning of the next period.

VI. Sales Discounts
a. Nature cash discount offered to credit customers to encourage prompt
payment; known as purchase discount on the part of the buyer
b. Accounting methods
i. Gross method
ii. Net method (payments beyond the discount period result in an account Sales discount
forfeited
that is classified as miscellaneous income
c. For proper matching, an estimate of sales discounts on receivables
outstanding at the end of the accounting period is made and the following
entry is made:
Sales discount
xx
Allowance for sales discount

xx

This entry is usually reversed at the beginning of the next period.

VII.

Freight Arrangements
a. Terms
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i. FOB shipping point vs. destination

ii. Freight collect (paid by buyer) vs. prepaid (paid by seller)
b. Accounting for freight
VIII.

Accounting for Bad Debts

a. Methods
i. Allowance
ii. Direct writeoff non-GAAP; used by very small companies; BIR-compliant
b. Bad Debt Estimation
i. Aging the accounts receivable (a.k.a. balance sheet approach)
ii. Percent of accounts receivable (a.k.a. balance sheet approach)
iii. Percent of sales (a.k.a. income statement approach)
For the B/S approaches, amount computed represents the required allowance.
This method results in proper valuation of receivables in the balance sheet.
For the I/S approach, amount computed represents the bad debts expense.
This method results in proper matching of revenues and expenses in the
income statement. Aging is done to test the reasonableness of the
allowance. Any discrepancy is considered a change in accounting estimate.
c. Presentation of Doubtful Accounts Expense in the income statement
i. As selling expense if credit and collection activity is under the sales
manager
ii. As administrative expense if credit and collection activity is under
another manager or if problem is silent

IX.

Receivables Analysis
a. Income/receivables recognition policy
b. Adequacy of allowance
c. Receivables turnover