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Lesson_3

The document outlines the classification and measurement of loans and receivables as defined by PAS 39, highlighting trade and nontrade receivables, their current and non-current classifications, and examples. It details the initial and subsequent measurement of receivables, including fair value considerations and deductions for allowances. Additionally, it discusses accounting for doubtful accounts and methods for estimating them.

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Desiree Galleto
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11 views

Lesson_3

The document outlines the classification and measurement of loans and receivables as defined by PAS 39, highlighting trade and nontrade receivables, their current and non-current classifications, and examples. It details the initial and subsequent measurement of receivables, including fair value considerations and deductions for allowances. Additionally, it discusses accounting for doubtful accounts and methods for estimating them.

Uploaded by

Desiree Galleto
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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INTRACT1

LOANS AND
RECEIVABLES
LOANS AND RECEIVABLES
◦PAS 39 defines loans and receivables as non-derivative
financial assets with fixed and determinable payments that are
not quoted in an active market.

◦Receivables are financial assets that represent a contractual


right to receive cash or another financial asset from another
entity.
Classification of receivables
◦Trade Receivables - refer to claims arising from sale of
merchandise or services in the ordinary course of business.
The usual types are:
1) Accounts receivable – are open accounts or those not supported
by promissory notes.
2) Notes receivable – are those supported by formal promises to
pay in the form of notes.
◦Nontrade Receivables - represent claims arising from sources
other than the sale of merchandise or services in the ordinary
course of business.
Receivables
◦An entity shall classify an asset as current when the entity
expects to realize the asset or intends to sell or consume it in
the entity’s normal operating cycle or when the entity expects
to realize the asset within twelve months after the reporting
period.
Receivables
◦ Trade receivables – are expected to be realized in cash within the normal
operating cycle or one year whichever is longer, are classified as current
asset.

◦ Nontrade receivables- are expected to be realized in cash within one year,


the length of the operating cycle notwithstanding, are classified as current
assets. If collectible beyond one year, non trade receivables are classified as
non-current assets.

◦ Trade and nontrade receivables which are currently collectible shall be


presented in the financial position as one line item called “ trade and
other receivables”
Examples of Nontrade
Receivables
1. Advances to or receivables from shareholders, directors, officers or
employees. If collectible in 1 year, such advances or receivables
should be classified as current assets, otherwise they are classified
as non-current assets.
2. Advances to affiliates are usually treated as long term investments.
3. Advances to supplier for the acquisition of merchandise are current
assets.
4. Subscriptions receivable are current assets if collectible within one
year. Otherwise they are shown as a deduction from subscribed
share capital.
Examples of Nontrade
Receivables
5. Creditors’ accounts may have debit balances as a result of
over payment of returns and allowances. These are classified as
current assets. If the debit balances are not material, an offset
may be made against the creditors’ accounts with credit
balances and only the net accounts payable is presented.
6. Special deposits on contract bids normally are classified as
other noncurrent assets because they are likely to remain
outstanding for a considerable long period of time. However,
those collectible currently should be classified as current
assets.
Examples of Nontrade
Receivables
7. Accrued income receivables such as dividends receivable,
accrued rent income, accrued royalties income and
accrued interest on bond investment are usually current
assets.
8. Claims receivable such as claims against common carriers
for losses or damages, claims for rebates and tax refunds,
claims from insurance companies are normally classified
as current assets.
Customers’ credit balances
◦These are credit balances in accounts receivable resulting
from overpayments, returns and allowances and advance
payments from customers.
◦The balances should classified as current liabilities and shall
not be offset against the debit balances in other customers’
accounts, except when the same is not material in which case
only the net amount may be presented.
Initial measurement of
Receivables
◦Receivables shall be measured at fair value plus transaction
costs that are directly attributable to the acquisition.
◦For short term receivables, the fair value is equal to the face
value or original invoice amount.
◦For long-term interest bearing receivables, the fair value is
equal to the face value.
◦For long-term non-interest bearing receivables, the fair value is
equal to the present value of all future cash flows, discounted
using the prevailing market rate of interest for similar
receivables.
Subsequent measurement of
Receivables
◦Loans and receivables shall be measured at amortized cost
using the effective interest method.

◦The amortized cost is the amount at which the receivable is


measured initially minus principal repayment, plus or minus
the cumulative amortization of any difference between the
initial amount recognized and the principal maturity amount,
minus reduction for impairment or uncollectibility.
Deductions to trade accounts
receivable
1. Allowance for freight charge
2. Allowance for sales return
3. Allowance for sales discount
4. Allowance for doubtful accounts
Freight charge

1. FOB shipping point – means that the ownership of goods


purchased is vested in the buyer upon shipment thereof.
2. FOB destination – means that the ownership of goods
purchased is vested in the buyer upon receipt thereof.
3. Freight collect – means that freight charge on the goods
shipped is not yet paid. The common carrier will collect the
same from the buyer.
4. Freight prepaid – means that freight charge on the goods
shipped is already paid by the seller.
Sales returns

◦the measurement of accounts receivable shall also recognize


the probability that some customers will return gods that are
unsatisfactory or will make other claims requiring reduction in
the amount due as in the case of shipment shortages and
defects.
Sales discount

◦Entities usually offer cash discount to credit customers. A cash


discount is a reduction from an invoice amount by reason of
prompt payment. A cash discount is known as sales discount
on the part of the seller and a purchase discount on the part of
the buyer.
◦Sales discount forfeited is classified as other income.
Accounting for doubtful accounts

◦The allowance for doubtful accounts is a deduction from


accounts receivable.
◦If the doubtful accounts is found to be worthless or
uncollectible, they are written off from the books.
Methods of estimating doubtful accounts

◦Aging the accounts receivable


◦Percent of accounts receivable
◦Percent of sales
Loan Receivable

◦Entity shall assess at every end of reporting period whether


there is objective evidence that a financial asset or group of
financial assets is impaired. If such evidence exists, the entity
shall determine and recognize the amount of any impairment
loss.

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