CHAPTER 7 Cash and Receivables ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Brief Exercises Exercises Problems 1, 2 Concepts for Analysis Topics Questions 1 Accounting for cash 1, 2, 3, 4, 22 2 Accounting for accounts receivable, bad debts, other allowances 5, 6, 7, 8, 9, 2, 3, 4, 5 10, 11, 12, 13, 14, 16, 20 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 14 2, 3, 4, 5, 6 1, 2, 3, 4, 9, 10 3 Accounting for notes receivable 14, 15 6, 7 18, 19 8, 9, 10 6, 7, 8 4 Assignment and factoring of accounts receivable 17, 18, 19 8, 9, 10, 11, 12 12, 13, 14, 15, 16, 17, 21 7, 11 4, 5, 6, 7, 8 5 Analysis of receivables 21 13 20, 21 *6 Petty cash and bank reconciliations 23 14, 15, 16 22, 23, 24, 25 12, 13, 14 *7 Loan impairments 24, 25 17 26, 27 15 *This material is covered in an Appendix to the chapter Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 71 ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives Identify items considered cash Indicate how to report cash and related items Define receivables and identify the different types of receivables Explain accounting issues related to recognition of accounts receivable Brief Exercises Exercises 1, 2 Problems 3, 4 2, 3 3, 4, 5, 6, 12 Explain accounting issues related to valuation of accounts receivable 4, 5 7, 8, 9, 10, 11, 12, 14 2, 3, 4, 5, 6 Explain accounting issues related to recognition and valuation of notes receivable 6, 7 18, 19 8, 9, 10 Explain the fair value option Explain accounting issues related to disposition of accounts and notes receivable 8, 9, 10, 11, 12 12, 13, 14, 15, 7, 11 16, 17, 21 Describe how to report and analyze receivables 13 20 11 *10 Explain common techniques employed to control cash 14, 15, 16 22, 23, 24, 25 12, 13, 14 *11 Describe the accounting for a loan impairment 17 26, 27 15 19 72 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) ASSIGNMENT CHARACTERISTICS TABLE Level of Difficu lty Time (minut es) E76 E77 E78 E79 E710 E711 E712 E713 E714 E715 E716 E717 E718 E719 E720 E721 *E722 *E723 *E724 *E725 *E726 *E727 Determining cash balance Determining cash balance Financial statement presentation of receivables Determining ending accounts receivable Record sales gross and net Recording sales transactions Recording bad debts Recording bad debts Computing bad debts and preparing journal entries Baddebt reporting Bad debts—aging Journalizing various receivable transactions Assigning accounts receivable Journalizing various receivable transactions Transfer of receivables with recourse Transfer of receivables with recourse Transfer of receivables without recourse Notes transactions at unrealistic interest rates Note receivable with unrealistic interest rate Analysis of receivables Transfer of receivables Petty cash Petty cash Bank reconciliation and adjusting entries Bank reconciliation and adjusting entries Impairments Impairments Moderate Moderate Simple Simple Simple Moderate Moderate Simple Simple Simple Simple Simple Simple Simple Simple Moderate Simple Simple Moderate Moderate Moderate Simple Simple Moderate Simple Moderate Moderate 10–15 10–15 10–15 10–15 15–20 5–10 10–15 5–10 8–10 10–12 8–10 15–20 10–15 15–18 10–15 15–20 10–15 10–15 20–25 10–15 10–15 5–10 10–15 15–20 15–20 15–25 15–25 P71 P72 P73 P74 P75 P76 P77 P78 P79 P710 P711 *P712 *P713 *P714 Determine proper cash balance Baddebt reporting Baddebt reporting—aging Baddebt reporting Baddebt reporting Journalize various accounts receivable transactions Assigned accounts receivable—journal entries Notes receivable with realistic interest rate Notes receivable journal entries Comprehensive receivables problem Income effects of receivables transactions Petty cash, bank reconciliation Bank reconciliation and adjusting entries Bank reconciliation and adjusting entries Simple Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Complex Moderate Moderate Moderate Moderate 20–25 20–25 20–30 25–35 20–30 25–35 25–30 30–35 30–35 40–50 20–25 20–25 20–30 20–30 Item E71 E72 E73 E74 E75 Description Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 73 *P715 Loan impairment entries Moderate 30–40 74 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) ASSIGNMENT CHARACTERISTICS TABLE (Continued) It e m CA71 CA72 CA73 CA74 CA75 CA76 CA77 CA78 CA79 CA710 Description Bad debt accounting Various receivable accounting issues Baddebt reporting issues Basic note and accounts receivable transactions Sale of notes receivable Zerointerestbearing note receivable Reporting of notes receivable, interest, and sale of receivables Accounting for zerointerestbearing note Receivables management Baddebt reporting, ethics Level of Difficu lty Time Simple Simple Moderate Moderate Moderate Moderate Moderate 10–15 15–20 25–30 25–30 20–25 20–30 25–30 Moderate Moderate Moderate 25–30 25–30 25–30 (minut es) Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 75 LEARNING OBJECTIVES *10 *11 *12 Identify items considered cash Indicate how to report cash and related items Define receivables and identify the different types of receivables Explain accounting issues related to recognition of accounts receivable Explain accounting issues related to valuation of accounts receivable Explain accounting issues related to recognition and valuation of notes receivable Explain the fair value option Explain accounting issues related to disposition of accounts and notes receivable Describe how to report and analyze receivables Explain common techniques employed to control cash Describe the accounting for a loan impairment Compare the accounting procedures for cash and receivables under GAAP and IFRS *This material is covered in an Appendix to the chapter 76 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) CHAPTER REVIEW *Note: All asterisked (*) items relate to material contained in the Appendix to the chapter Chapter presents a detailed discussion of two of the primary liquid assets of a company, cash and receivables. Cash is the most liquid asset held by a company and possesses unique problems in its management and control. Receivables are composed of both accounts and notes receivables Chapter coverage of accounts receivable places emphasis on trade receivables. In covering notes receivables, the chapter includes both shortterm and longterm notes Nature of Cash (S.O. 1) Cash consists of coin, currency, bank deposits, and negotiable instruments such as money orders, checks, and bank drafts. Reporting Cash (S.O 2) Cash equivalents are shortterm, highly liquid investments that are both (a) readily convertible to known amounts of cash and (b) so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. If an asset is not cash and is shortterm in nature, it should be reported as as a temporary investment It is common practice for a corporation to have an agreement with a bank concerning credit and borrowing arrangements. When such an agreement exists, the bank usually requires the company to maintain a minimum cash balance on deposit. This minimum balance is known as a compensating balance. Compensating balances that result in legally restricted deposits must be separately classified in the balance sheet. The nature of the borrowing arrangement determines whether the compensating balance is classified as a current asset or a noncurrent asset Cash that has been designated for some specific use, other than for payment of currently maturing obligations, is segregated from the general cash account. This amount may be classified as a current asset if it will be disbursed within one year or the operating cycle, whichever is longer. Otherwise, the amount should be shown as a noncurrent asset Bank overdrafts occur when a company writes a check for more than the amount in the cash account. Bank overdrafts should be accounted for as accounts payable or, if material, separately disclosed on the balance sheet or in the related notes Accounts Receivable (S.O. 3) Receivables are claims held against customers and others for money, goods, or services Receivables may generally be classified as trade or nontrade. Trade receivables (accounts receivable and notes receivable) are the most significant receivables an enterprise possesses. Accounts receivable are oral promises of the purchaser to pay for goods and services sold. Notes receivable are written promises to pay a certain sum of money on a specified future date. Nontrade receivables arise from a variety of transactions Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 77 and can be written promises either to pay or to deliver. Nontrade receivables are generally classified and reported as separate items in the balance sheet (S.O. 4) In most receivable transactions, the amount to be recognized is the exchange price (amount due from the debtor) between the two parties. Two factors that may complicate the measurement of the exchange are (a) the availability of discounts (trade and cash) and (b) the length of time between the sale and the payment due date (the interest element) Two types of discounts that must be considered in determining the value of receivables are trade discounts and cash discounts. Trade discounts represent reductions from the list or catalog prices of merchandise. They are often used to avoid frequent changes in catalogs or to quote different prices for different quantities purchased. Cash discounts (also called sales discounts) are offered as an inducement for prompt payment and are communicated in terms that read, for example, 2/10, n/30 (2% discount if paid within 10 days of the purchase or invoice date, otherwise the gross amount is due in 30 days) 10 (S.O. 5) It is highly unlikely that a company that extends credit to its customers will be successful in collecting all of its receivables Thus, some method must be adopted to account for receivables that ultimately prove to be uncollectible. The two methods currently used are the direct writeoff method and the allowance method. 11 Under the direct writeoff method, the receivable account is reduced and an expense is recorded when a specific account is determined to be uncollectible. The directwrite off method is theoretically deficient because it usually does not match costs and revenues of the period, nor does it result in receivables being stated at estimated realizable value on the balance sheet. The direct writeoff method is not appropriate if the amount deemed uncollectible is material 12 Use of the allowance method requires a yearend estimate of expected uncollectible accounts based upon credit sales or outstanding receivables This ensures that companies state receivables on the balance sheet at their net realizable value Net realizable value is the net amount the company expects to receive in cash. The estimate of uncollectible accounts is recorded by debiting an expense and crediting the allowance account in the period in which the sale is recorded. Then, in a subsequent period, when an account is deemed to be uncollectible, an entry is made debiting the allowance account and crediting accounts receivable 13 Advocates of the allowance method contend that its use provides for a proper matching of revenues and expenses as well as reflecting a proper carrying value for accounts receivable at the end of the period. When the allowance method is used, the estimated amount of uncollectible accounts is normally based upon a percentage of sales or outstanding receivables The percentageofsales method attempts to match costs with revenues, and is frequently referred to as the income statement approach. The percentageofreceivables approach provides a reasonably accurate estimate of the net realizable value of receivables shown on the balance sheet. This approach is commonly referred to as the balance sheet approach 14 The method used to determine the amount of bad debt expense each year affects the amount of expense recorded. Under the percentageofsales method, the amount recorded 78 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) as bad debt expense is the amount determined by multiplying the estimated percentage times the credit sales. However, under the percentageofreceivables approach, the unadjusted ending balance in the allowance account must be considered in arriving at bad debts expense for the year Notes Receivable 15 (S.O 6) The major differences between trade accounts receivables and trade notes receivables are (a) notes represent a formal promise to pay and (b) notes bear an interest element because of the time value of money Notes are classified as notes bearing interest equal to the effective rate and those bearing interest different than the effective rate Interestbearing notes have a stated rate of interest, whereas zero interestbearing notes (noninterestbearing) include the interest as part of their face amount instead of stating it explicitly 16 Shortterm notes are generally recorded at face value (less allowances) because the interest implicit in the maturity value is immaterial. A general rule is that notes treated as cash equivalents (maturities of 3 months or less) are not subject to premium or discount amortization. Longterm notes receivable, however, are recorded at the present value of the future cash inflows. Determination of the present value can be complicated, particularly when a zerointerestbearing note or a note bearing an unreasonable interest rate is involved 17 Longterm notes receivable should be recorded and reported at the present value of the cash expected to be collected. When the interest stated on an interestbearing note is equal to the effective (market) rate of interest, the note sells at face value. When the stated rate is different from the market rate, the cash exchanged (present value) is different from the face value of the note. The difference between the face value and the cash exchanged, either a discount or a premium, is then recorded and amortized over the life of the note to approximate the effective interest rate. The discount or premium is shown on the balance sheet as a direct deduction from or addition to the face of the note 18 Whenever the face amount of a note does not reasonably represent the present value of the consideration given or received in the exchange, the accountant must evaluate the entire arrangement to properly record the exchange and the subsequent interest. Notes receivable are sometimes issued with no (zero) interest rate stated or at a stated rate that is unreasonable. In such instances the present value of the note is measured by the cash proceeds to the borrower or fair value of the property, goods, or services rendered. The difference between the face amount of the note and the cash proceeds or fair value of the property represents the total amount of interest during the life of the note. If the fair value of the property, goods, or services rendered is not determinable, estimation of the present value requires use of an imputed interest rate. The choice of a rate may be affected specifically by the credit standing of the issuer, restrictive covenants, collateral, payment schedule, and the existing prime interest rate. Determination of the imputed interest rate is made when the note is received; any subsequent changes in prevailing interest rates are ignored Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 79 19 The FASB requires that companies disclose the fair value of receivables in the notes to the financial statements. Recently the Board has given companies the option to use fair value as the basis of measurement in the financial statements. If companies choose the fair value option, the receivables are recorded at fair value, with unrealized holding gains or losses reported as part of net income. An unrealized holding gain or loss is the net change in the fair value of the receivable from one period to another, exclusive of interest revenue Secured Borrowing 20 (S.O. 8) Receivables are often used as collateral in a borrowing transaction. A creditor often requires that the debtor designate (assign) or pledge receivables as security for the loan. If the loan is not paid when due, the creditor has the right to convert the collateral to cash, that is, to collect the receivables Sales of Receivables 21 When accounts and notes receivable are factored (sold), the factoring arrangement can be with recourse or without recourse. If receivables are factored on a with recourse basis, the seller guarantees payment to the factor in the event the debtor does not make payment. When a factor buys receivables without recourse, the factor assumes the risk of collectibility and absorbs any credit losses. Receivables that are factored with recourse should be accounted for as a sale, recognizing any gain or loss, if all three of the following conditions are met: (a) the transferred asset has been isolated from the transferor, (b) the transferees have obtained the right to pledge or exchange either the transferred assets or beneficial interests in the transferred assets, and (c) the transferor does not maintain effective control over the transferred assets through an agreement to repurchase or redeem them before their maturity Presentation and Analysis 22 (S.O 9) The presentation of receivables in the balance sheet includes the following considerations: (a) segregate the different types of receivables that a company possesses, if material; (b) appropriately offset the valuation accounts against the proper receivable accounts: (c) determine that receivables classified in the current assets section will be converted into cash within the year or the operating cycle, whichever is longer; (d) disclose any loss contingencies that exist on the receivables; (e) disclose any receivables designated or pledged as collateral; and (f) disclose the nature of credit risk inherent in the receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses 23 The ratio used to assess the liquidity of receivables is the receivables turnover ratio, which measures the number of times, on average, receivables are collected during the period Accounts Receivable Turnover = Net Sales Average Trade Receivables (net) Days to Collect 365 = Accounts Receivable Accounts Receivable Turnover 710 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) T EACHING T IP Illustration 73 provides examples of an interestbearing note and a zerointerestbearing note, and demonstrates computation of present values and amortization tables. Note that for explanatory purposes, the amortization tables utilize slightly different headings from the ones used in the text G Notes Receivable—Valuation Issues Notes should be reported at net realizable value although the allowance for doubtful accounts can be difficult to estimate for longterm notes Companies must disclose the fair value of notes receivables in the notes to the financial statement A note receivable is considered impaired when it is probable that the creditor will be unable to collect all amounts due (both principal and interest) according to the contractual terms of the receivable. In this case, a loss is recorded for the amount of the impairment H (L.O. 7) Fair Value Option 1. Companies have the option of using fair value as the basis of measurement of notes receivable in the financial statements a If companies choose the fair value option, receivables are recorded at fair value and unrealized holding gains or losses are reported as part of net income b Unrealized holding gains or losses are the net change in the fair value of receiv ables from one period to another, excluding interest revenue I (L.O. 8) Accounts and Notes Receivable—Disposition Issues. In order to accelerate the receipt of cash from receivables, they may be transferred to a third party for cash Secured Borrowing (Assigning or Pledging). The owner of the accounts receivable borrows cash by writing a promissory note designating the accounts receivable as collateral a The borrower and lender agree as to the specific receivable accounts that serve as security. The assignor (borrower) typically makes collections on the assigned accounts and remits the collections plus a finance charge (interest cost) to the lender b The borrower also recognizes all discounts, returns and allowances, and bad debts Sale (Factoring). These transfers of accounts and notes receivable may be without recourse or with recourse Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 717 T EACHING T IP Illustration 74 can be used to highlight the rules pertaining to a secured borrowing and the sale of receivables with or without recourse a Sale Without Recourse—The purchaser assumes the risk of collectibility and absorbs any credit losses. This is an outright sale of receivables both in form and substance. A loss on the sale is recognized for the excess of the face value of the receivables over the cash proceeds (1) A Due From Factor account (reported as a receivable) is used by the seller to account for any proceeds retained by the factor to cover probable sales discounts, sales returns, and sales allowances (2) The factor maintains a corresponding “Due To” account (reported as a liability) b Sale With Recourse—The seller guarantees payment to the purchaser for those receivables which become uncollectible (1) A Due From Factor account is maintained as indicated in a sale without recourse (2) A Recourse Obligation account (reported as a liability) is used by the seller to recognize the probable payment to the factor for uncollectible accounts (3) Loss on sale calculation: c (a) Net proceeds = cash received + due from factor – recourse obligation (b) Loss = book value of receivables sold – net proceeds The FASB requires that all three of the following conditions must be met before a company can record a sale: (1) The transferred asset has been isolated from the transferor (2) The transferees have obtained the right to pledge or exchange either the transferred assets or beneficial interests in the transferred assets (3) The transferor does not maintain effective control over the transferred assets through an agreement to repurchase or redeem them before their maturity d If the transfer with recourse does not meet these three conditions, the transaction is accounted for as a secured borrowing and a liability is recorded J (L.O. 9) Presentation and analysis of receivables General classification rules: 718 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) a Segregate the different types of receivables, if material b Appropriately offset valuation accounts against the proper receivable accounts c Determine that receivables classified as current assets will be converted into cash within the year or the operating cycle, whichever is longer d Disclose any loss contingencies that exist on the receivables e Disclose any receivables designated or pledged as collateral f Disclose the nature of credit risk inherent in the receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes in the allowance for credit losses Accounts receivable turnover ratio: measures the number of times, on average, receivables are collected during the period. Companies frequently use the average collection period, also known as days’ outstanding, to assess the effectiveness of a company’s credit and collection policies a Net Sales A/R Turnover = Average Trade Receivables (net) b Days’ Outstanding = 365 _ A/R Turnover K (L.O. 10) Appendix 7A: Cash Controls Bank Accounts. a A company can vary the number and location of banks and the types of bank accounts. Multiple collection centers generally reduce the size of a company’s collection float. This is the difference between the amount on deposit according to the company’s records and the amount of collected cash according to the bank record b Large, multilocation companies frequently use lockbox accounts to collect in cities with heavy customer billing c Companies use imprest bank accounts to make a specific amount of cash available for a limited purpose. The account acts as a clearing account for a large volume of checks or for a specific type of check Imprest Petty Cash System a Accounting procedures for a petty cash system: Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 719 T EACHING T IP Illustration 75 provides a numerical example of establishing a petty cash fund and its sub sequent reimbursement (1) The Petty Cash account is debited or credited only when the fund is first established or is changed in size (2) Each disbursement from the fund should be evidenced by a signed receipt indicating the recipient and the purpose of the expenditure (3) Reimbursements of the petty cash fund are recorded by debiting the expenses, assets, or liabilities involved, and crediting the Cash account (4) The Cash Over and Short account is used as a plug (miscellaneous expense or miscellaneous revenue) when the petty cash fund fails to prove out Physical Protection of Cash Balances a A company should keep funds in a vault, safe, or locked cash drawer The company should transmit intact each day’s receipts to the bank as soon as practicable Bank Reconciliations a Two forms of bank reconciliations may be prepared: (1) Reconciliation from the bank statement balance to the book balance or vice versa (2) Reconciliation of bank and book balances to the corrected cash balance. This form consists of two separate sections: (a) “Balance per bank statement” section (b) “Balance per books” section (3) The latter form is illustrated in the text. It is useful because it facilitates com putation of the correct cash balance, which is the amount that should be reported on the balance sheet b The preparation of a twosection bank reconciliation T EACHING T IP Illustration 76 provides an example format of a twosection bank reconciliation that reconciles the bank and book balances to a corrected cash balance 720 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) (1) “Balance per bank statement” section (a) The “balance per bank statement” is the amount shown on the most recent bank statement as of the bank’s closing date for the month (b) Add deposits recorded in the company’s books, but not yet credited by the bank (e.g., deposits in transit) (c) Deduct charges recorded in the company’s books, but not yet recorded by the bank (e.g., outstanding checks) (2) “Balance per books” section (a) The “balance per books” is the amount shown in the company’s Cash or Cash in Checking Account general ledger account as of the desired reconciliation date (i.e., as of the balance sheet date, the monthend date, or whatever date for which it is desired to compute the correct cash balance) (b) Add deposits recorded by the bank, but not yet recorded by the company (e.g., collection of notes, interest earned on interestbearing checking accounts, etc.) (c) Deduct charges recorded by the bank, but not yet recorded by the company (e.g., service charges, NSF checks, etc.) (3) Both sections end with the correct cash balance, which is the amount that should be reported on the balance sheet (4) Every reconciling item that appears in the “balance per books” section requires an adjusting entry to bring the books to the correct cash balance L (L.O. 11) Appendix 7B: Impairments An impaired loan receivable exists when it is probable that the company will be unable to collect all amounts due (principal and interest) according to terms of the loan Impairment loss is the difference between the investment in the loan and the present value of the future cash flows discounted at the loan’s historical effective interest rate Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 721 M. (L.O. 12) IFRS Insights The basic accounting and reporting issues related to recognition and measurement of receivables, such as the use of allowance accounts, how to record discounts, use of the allowance method to account for bad debts, and factoring, are similar for both IFRS and U.S GAAP IAS 1 (“Presentation of Financial Statements”) is the only standard that discusses issues specifically related to cash IFRS 7 (“Financial Instruments: Disclosure”) and IAS 39 (“Financial Instruments: Recognition and Measurement”) are the two international standards that address issues related to financial instruments and more specifically receivables RELEVANT FACTS a The accounting and reporting related to cash is essentially the same under both IFRS and U.S. GAAP. In addition, the definition used for cash equivalents is the same. One difference is that, in general, IFRS classifies bank overdrafts as cash b Like the U.S. GAAP, cash and receivables are generally reported in the current asset section of the balance sheet under IFRS. However, companies may report cash and receivables as the last items in current assets under IFRS c IFRS requires that loans and receivables be accounted for at amortized cost, adjusted for allowances for doubtful accounts. IFRS sometimes refers to these allowances as provisions d Although IFRS implies that receivables with different characteristics should be reported separately, there is no standard that mandates this segregation e IFRS and U.S GAAP on the fair value option are similar, but not identical The international standard related to the fair value option is subject to certain qualifying criteria not in the U.S. standard. In addition, there is some difference in the financial instruments covered f IFRS and U.S. GAAP differ in the criteria used to account for transfers of receivables IFRS is a combination of an approach focused on risks and rewards and loss of control U.S. GAAP uses loss of control as the primary criterion. In addition, IFRS generally permits partial transfers; U.S. GAAP does not g Impairment evaluation process Under IFRS, companies assess their receivables for impairment each reporting period and start the impairment assessment by considering whether objective evidence indicates that one or more loss events have occurred. GAAP does not identify a specific approach h Recovery of impairment loss Subsequent to recording an impairment, events or economic conditions may change such that the extent of the impairment loss decreases (e.g., due to an impairment in the debtor’s credit rating). Under IFRS, some or all of the previously recognized impairment loss shall be reversed either directly, with a debit to Accounts Receivable, or by debiting the allowance account and crediting Bad Debt Expense ON THE HORIZON The question of recording fair values for financial instruments will continue to be an important issue to resolve as the Boards work toward convergence. Both the IASB and the FASB have 722 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) indicated that they believe that financial statements would be more transparent and understandable if companies recorded and reported all financial instruments at fair value. a In IFRS 9, which was issued in 2009, the IASB created a split model, where some financial instruments are recorded at fair value, but other financial assets, such as loans and receivables, can be accounted for at amortized cost if certain criteria are met. b A proposal by the FASB would require that nearly all financial instruments, including loans and receivables, be accounted for at fair value. c It has been suggested that IFRS 9 will likely be changed or replaced as the FASB and IASB continue to deliberate the best treatment for financial instruments. In fact, one member of the IASB said that companies should ignore IFRS 9 and continue to report under the old standard, because in his opinion, it was extremely likely that it would be changed before the mandatory adoption date of this standard arrived in 2013 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 723 ILLUSTRATION 71 METHODS OF ESTIMATING THE YEAREND ADJUSTING ENTRY FOR BAD DEBT EXPENSE 724 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) ILLUSTRATION 72 ESTIMATING BAD DEBT EXPENSE Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 725 ILLUSTRATION 73 INTERESTBEARING AND ZEROINTERESTBEARING NOTES RECEIVABLE 726 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) ILLUSTRATION 73 (continued) Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 727 ILLUSTRATION 74 ACCOUNTING FOR TRANSFERS OF RECEIVABLES 728 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) ILLUSTRATION 75 PETTY CASH Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 729 730 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) ILLUSTRATION 76 BANK RECONCILIATION Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 731 ... Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 721 M. (L.O. 12) IFRS Insights The basic accounting and reporting issues... Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 727 ILLUSTRATION 74 ACCOUNTING FOR TRANSFERS OF RECEIVABLES ... 74 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) ASSIGNMENT CHARACTERISTICS TABLE (Continued)