Receivable Financing 2019
Lecture Notes 1.4.2 An entity has transferred substantially all the
1.0 Accounting for Derecognition of Financial
Assets
1.1 The basic premise for the derecognition model in
PAS 39 is to determine whether the asset under
consideration for derecognition is:
• an asset in its entirety; or
• specifically identified cash flows from an asset; or
• a fully proportionate share of the cash flows from
an asset; or
• a fully proportionate share of specifically identified
cash flows from a financial asset.
1.2 An entity shall derecognize a financial asset
when, and only when:
(a) the contractual rights to the cash flows from the
financial asset expire; or
(b) it transfers the financial asset as set out in PAS 39
paragraphs 18 and 19 and the transfer qualifies for
derecognition in accordance with paragraph 20.
1.3 An asset is transferred if either the entity has
transferred the contractual rights to receive the cash
flows, or the entity has retained the contractual rights
to receive the cash flows from the asset, but has
assumed a contractual obligation to pass those cash
flows on under an arrangement that meets the
following three conditions:
• the entity has no obligation to pay amounts to the
eventual recipient unless it collects equivalent
amounts on the original asset,
• the entity is prohibited from selling or pledging the
original asset (other than as security to the
eventual recipient), and
• the entity has an obligation to remit those cash
flows without material delay.
1.4 Once an entity has determined that the asset has
been transferred, it then determines whether or not it
has transferred substantially all of the risks and
rewards of ownership of the asset. If substantially all
the risks and rewards have been transferred, the asset
is derecognized. If substantially all the risks and
rewards have been retained, derecognition of the asset
is precluded.
1.4.1 An entity has retained substantially all the risks
and rewards of ownership of a financial asset if its
exposure to the variability in the present value of the
future net cash flows from the financial asset does not
change significantly as a result of the transfer.
Examples:
• a sale and repurchase transaction where the
repurchase price is a fixed price or the sale price
plus a lender’s return
• a securities lending agreement
• a sale of a financial asset together with a total
return swap that transfers the market risk
exposure back to the entity
• a sale of a financial asset together with a deep in-
the-money put or call option (ie an option that is
so far in the money that it is highly unlikely to go
out of the money before expiry)
• a sale of short-term receivables in which the entity
guarantees to compensate the transferee for credit
losses that are likely to occur
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risks and rewards of ownership of a financial asset if its
exposure to such variability is no longer significant in
relation to the total variability in the present value of
the future net cash flows associated with the financial
asset (eg because the entity has sold a financial asset
subject only to an option to buy it back at its fair value
at the time of repurchase or has transferred a fully
proportionate share of the cash flows from a larger
financial asset in an arrangement, such as a loan sub-
participation, that meets the pass-through conditions).
1.5 If the entity has neither retained nor transferred
substantially all of the risks and rewards of the asset,
then the entity must assess whether it has relinquished
control of the asset or not. If the entity does not
control the asset then derecognition is appropriate;
however if the entity has retained control of the asset,
then the entity continues to recognize the asset to the
extent to which it has a continuing involvement in the
asset.
1.5.1 Whether the entity has retained control of the
transferred asset depends on the transferee’s ability to
sell the asset. If the transferee has the practical ability
to sell the asset in its entirety to an unrelated third
party and is able to exercise that ability unilaterally
and without needing to impose additional restrictions
on the transfer, the entity has not retained control. In
all other cases, the entity has retained control.
1.5.2 Continuing involvement in transferred assets
The extent of the entity’s continuing involvement in
the transferred asset is the extent to which it is
exposed to changes in the value of the transferred
asset. For example:
a) when the entity’s continuing involvement takes the
form of guaranteeing the transferred asset, the
extent of the entity’s continuing involvement is the
lower of (i) the amount of the asset and (ii) the
maximum amount of the consideration received
that the entity could be required to repay (‘the
guarantee amount’).
b) when the entity’s continuing involvement takes the
form of a written or purchased option (or both) on
the transferred asset, the extent of the entity’s
continuing involvement is the amount of the
transferred asset that the entity may repurchase.
However, in case of a written put option on an
asset that is measured at fair value, the extent of
the entity’s continuing involvement is limited to the
lower of the fair value of the transferred asset and
the option exercise price.
c) when the entity’s continuing involvement takes the
form of a cash-settled option or similar provision
on the transferred asset, the extent of the entity’s
continuing involvement is measured in the same
way as that which results from non-cash settled
options as set out in (b) above.
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1.6 The following flow chart illustrates the evaluation 2.4 Computation of the amount to be recognized in
of whether and to what extent a financial asset is profit or loss
derecognized. 2.4.1 Derecognition of a financial asset in its entirety
Consideration received Pxx
Less Carrying amount Pxx
FV adj. loss (OCI) xx
FV adj. gain (OCI) (xx) xx
Gain (loss) in P/L Pxx

2.4.2 Derecognition of part of a financial asset

Consideration received Pxx
Less Allocated carrying amount Pxx
Allocated FV adj. loss (OCI) Xx
Allocated FV adj. gain (OCI) (xx) xx
Gain (loss) in P/L Pxx

If the transferred asset is part of a larger financial

asset (eg when an entity transfers interest cash flows
that are part of a debt instrument) and the part
transferred qualifies for derecognition in its entirety,
the previous carrying amount of the larger financial
asset shall be allocated between the part that
continues to be recognized and the part that is
derecognized, based on the relative fair values of those
parts on the date of the transfer. For this purpose, a
retained servicing asset shall be treated as a part that
continues to be recognized.

A cumulative gain or loss that had been recognized in

other comprehensive income is allocated between the
part that continues to be recognized and the part that
is derecognized, based on the relative fair values of
those parts.

2.4.3 Derecognition of a financial asset coupled with

a new financial asset or financial liability
Consideration received Pxx
New financial asset xx
New financial liability (xx) Pxx
Less Carrying amount xx
FV adj. loss (OCI) xx
FV adj. gain (OCI) (xx) xx
Gain (loss) in P/L Pxx

If, as a result of a transfer, a financial asset is

derecognized in its entirety but the transfer results in
the entity obtaining a new financial asset or assuming
2.0 Transfers that qualify for derecognition a new financial liability, or a servicing liability, the
entity shall recognize the new financial asset, financial
2.1 If an entity transfers a financial asset in a liability or servicing liability at fair value.
transfer that qualifies for derecognition in its entirety
and retains the right to service the financial asset for a
fee, it shall recognize either a servicing asset or a 3.0 Transfers that do not qualify for
servicing liability for that servicing contract. derecognition

2.2 Servicing liability If a transfer does not result in derecognition because

If the fee to be received is not expected to compensate
the entity adequately for performing the servicing, a
servicing liability for the servicing obligation shall be
recognized at its fair value.
2.3 Servicing asset
If the fee to be received is expected to be more than
adequate compensation for the servicing, a servicing
asset shall be recognized for the servicing right at an
amount determined on the basis of an allocation of the
carrying amount of the larger financial asset.
the entity has retained substantially all the risks and
rewards of ownership of the transferred asset, the
entity shall continue to recognize the transferred asset
in its entirety and shall recognize a financial liability for
the consideration received. In subsequent periods, the
entity shall recognize any income on the transferred
asset and any expense incurred on the financial
liability.

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4.0 Receivables as a source of cash
• Receivables can be converted to cash in two ways:
a. As a sale, with or without recourse (for
transfers that qualify for derecognition).
b. As a secured borrowing (for transfers that do
not qualify for derecognition).
Sale of receivables without recourse
• The company is not liable if customers do not pay.
• Often called “factoring” of receivables. The buyer
is known as the “factor.”
• Often includes arrangement for the financial
institution to assume entire credit function.
a. The business is relieved of all receivables
related activities: analyzing and making credit
extension decisions, keeping receivables-
related records, billing and collection, etc.
b. The extensive nature of the activities and risks
assumed by the factor make this a relatively
more expensive form of receivables-based
financing.
c. Factor may only make partial cash payment at
time of sale as they withhold a balance to
protect themselves from future sales
returns/allowances or other special
adjustments. Final settlement occurs once
receivables are collected.
Sale of receivables with recourse
Different from factoring as the purchaser of the
receivables maintains right to collect from seller if
seller’s customers fail to pay.
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Receivable Financing 2019
Secured borrowing
• Also called “securitization of receivables”
• Is a borrowing transaction supported by a pledge
or assignment of receivables as collateral for a
loan.
• The assignment of accounts receivable can be a
general assignment or a specific assignment.
In a general assignment (pledge), all accounts
receivable serve as collateral for the note. Thus,
new receivables can be substituted for the ones
collected.
In a specific assignment, an agreement is reached
between the borrower and lender concerning:
(a) who is to receive the collections,
(b) the finance charges,
(c) the specific accounts that serve as security,
and
(d) notification or nonnotification of debtors.
The accounts assigned in a specific assignment
should be transferred to a special ledger control
account, and assignment should be clearly noted in
the subsidiary ledger.
• No special accounting for the borrowing is needed:
debit Cash and credit Notes/Loans Payable.
• However, does require parenthetical or note
disclosure relating to details of transaction.
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PROBLEMS
1. Ron Company assigned certain accounts receivable to a bank for a loan on the following
basis: 75% cash advance, 4% service charge on gross accounts assigned, 2% interest per
month is to be charged, and the bank makes the collections. The entity signed a
promissory note for the loan.
July 1 Received remittance upon the specific assignment of
P1,500,000 in accounts to the bank.
Aug. 1 Received notice from bank that P800,000 of the assigned
accounts were collected. A check was sent to the bank for
one-month interest charge.
Sept. 1 Received notice from bank that assigned accounts of
P500,000 were collected in full and the remaining
accounts of P200,000 were being returned. Accordingly, a
check was received from the bank in settlement of the
assignment contract. In making the settlement, the bank
deducted the interest charge for the corresponding
period.
How much cash was received from the bank on September 1?
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2. Marj Company provided the following transactions:
May 1 Marj Company assigned P800,000 of accounts receivable
to a bank in consideration for a loan.
A cash advance of 80% less service charge of P20,000
was made by the latter.
It was agreed that interest of 2% per month is to be
made and that the assignor continues to make the
collections. The entity signed a promissory note for the
loan.
5 The entity issued a credit memo to a customer for
returned merchandise, P30,000. The account is one of the
assigned accounts.
10 Collections of P500,000 of the assigned accounts were
made, less 2% discount.
June 1 Remitted the collections to the bank plus 2% interest for
one month.
7 Assigned accounts of P10,000 proved to be worthless.
20 Collections of P200,000 for the accounts assigned were
made.
July 1 Final settlement was made with the bank. Marj Company
accordingly remitted the total amount due the bank to
pay off the loan plus interest charge.
How much of the Accounts Receivable – Assigned was reassigned to Accounts Receivable
on July 1?
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3. Sipalay Co. assigned P500,000 of accounts receivable to Hinigaran Finance Co. as security
for a loan of P420,000. Hinigaran charged a 2% commission on the amount of the loan;
the interest rate on the note was 10%. During the first month, Sipalay collected P110,000
on assigned accounts after deducting P380 of discounts. Sipalay accepted returns worth
P1,350 and wrote off assigned accounts totaling P3,700.
Required:
a. The amount of cash Sipalay received from Hinigaran at the time of the transfer
was
b. Entries during the first month would include a
6. Zia Company sold accounts without recourse with face amount of P6,000,000. The factor
charged 15% commission on all accounts receivable factored and withheld 10% of the
accounts factored as protection against customer returns and other adjustments. The
entity had previously established an allowance for doubtful accounts of P200,000 for these
accounts. By year-end, the entity had collected the factor’s holdback there being no
customer returns and other adjustments.
Required:
a. How much cash was received from the factor?
b. How much was the cost of factoring?

4. On November 30, 2019, accounts receivable in the amount of P900,000 were assigned to
Kaban Finance Co. by Kalan as security for a loan of P750,000. Kaban charged a 3%
commission on the accounts; the interest rate on the note is 12%. During the December
2019, Kalan collected P350,000 on assigned accounts after deducting P560 of discounts.
Kalan wrote off a P530 assigned account. On December 31, 2019, Kalan remitted to
Kaban the amount collected plus one month's interest on the note.
7. Zeus Company factored P6,000,000 of accounts receivable to a finance entity at the
beginning of current year. Control was surrendered by Zeus Company. The factor accepted
the accounts receivable subject to recourse for nonpayment. The fair value of the recourse
obligation is P100,000. The factor assessed a fee of 3% and retained a holdback equal to
5% of the accounts receivable. In addition, the factor charged 15% interest computed on
a weighted average time to maturity of the accounts receivable of 54 days.

How much is Kalan’s equity in the assigned accounts receivable as of December 31, 2019? Required:
a. What is the amount of cash initially received from the factoring?
b. If all accounts are collected, what is the loss on factoring the accounts receivable?
5. On December 1, 2019, Solvent Company assigned a specific accounts receivable totaling c. If all accounts are not collected, what is the loss on factoring?
P5,000,000 as collateral on a P4,000,000 12% note from a certain bank. The entity will
continue to collect the assigned accounts receivable. In addition to the interest on the
note, the bank also charged a 5% finance fee deducted in advance on the assigned
accounts. The December collections of assigned accounts receivable amounted to
P2,000,000 less cash discount of P200,000. On December 31, 2019, the entity remitted
the collections to the bank in payment for the interest accrued on December 31, 2019 and
the note payable. The entity accepted sales returns of P100,000 on the assigned accounts
and wrote off assigned accounts of P300,000.

Required:
a. What amount of cash was received from the assignment of accounts receivable on
December 1, 2019?
b. What is the carrying amount of note payable on December 31, 2019?
c. What amount should be disclosed as the equity of Solvent Company in assigned
accounts on December 31, 2019?

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 Receivable Financing 2019
8. Seller Corp. factored P400,000 of accounts receivable with Buyer, Inc., on a without-
recourse basis. The factor charge was 1.75% of the amount of receivables, and an
additional 4% was retained to cover probable adjustments. In addition to the factor
charge, a finance charge was withheld equal to 12% annually for any amounts advanced
prior to the due dates of the receivables. This charge was based on 100% of the face
value. The average credit term was 30 days from the date of transfer. According to the
terms of the factoring agreement, Seller was to handle returned goods, allowances, and
shipping disputes. Buyer was to collect the cash and acknowledge sales discounts, but
such discounts were to be charged to Seller. Credit losses were to be absorbed by Buyer.
Seller has not recorded any bad debt expense related to the factored receivables. The
following transactions pertain to this factoring arrangement:
Aug. 1 The receivable records were transferred to
Buyer.
31 Buyer collected P234,000 during August
after allowing for P9,000 of sales discounts.
Sales returns and allowances during August
totaled P2,400.
Sept. 20 Buyer wrote off a P2,000 account after
learning of the company's bankruptcy.
30 Buyer collected P151,720 during September.
Sales returns and allowances during
September totaled P880.
Oct. 10 Seller and Buyer made a final cash
settlement.
9. Natalya Company showed the following balances on December 31:
Accounts receivable - unassigned 1,000,000
Accounts receivable - assigned 300,000
Allowance for doubtful accounts - January 1 30,000
Receivable from factor 40,000
Note payable - bank 240,000
During the current year, the entity found itself in financial distress and decided to resort to
receivable financing. On June 30, the entity factored P200,000 of accounts receivable to a
finance entity. The finance entity charged a factoring fee of 5% of the accounts factored
and withheld 20% of the amount factored.
On December 31, the entity assigned P300,000 of accounts receivable to a bank under a
nonnotification basis. The bank advanced 80% less a service fee of 5% of the accounts
assigned. The entity signed a promissory note for the loan.
On December 31, it is estimated that 5% of the outstanding accounts receivable may
prove uncollectible.
Required:
a. Prepare journal entry to record the factoring.
b. Prepare journal entry to record the assignment.
c. Prepare journal entry to adjust the allowance for doubtful accounts on December
31.

Required: 10. Walleye Company provided the following transactions:

a. What net cash proceeds did Seller ultimately realize from the factoring?
b. What was the factor's net income from the factoring? Jan. 1 The entity sold merchandise for P500,000 accepting a
note of P500,000 for six months with interest to be paid
at maturity at 12%.

March 1 The entity discounted the note without recourse at the

local bank at 15%.

July 1 The customer paid the bank in full.

What is the journal entry to record the March 1 transaction?

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 Receivable Financing 2019
11. On January 1, 2019, Ted Company sold land with carrying amount of P1,500,000 in
exchange for a 9-month, 10% note with face value of P2,000,000. On April 1, 2019, the
entity discounted the note with recourse. The bank discount rate is 12%. The discounting
transaction is accounted for as a secured borrowing.
On October 1, 2019, the maker dishonored the note receivable. The entity paid the bank
the maturity value of the note plus protest fee of P10,000. On December 31, 2019, the
entity collected the dishonored note receivable in full plus 12% annual interest on the total
amount due.
Required:
a. What is the journal entry to record the April 1 transaction?
b. How much was collected from the customer on December 31, 2019?
12. Marshall Company provided the following transactions:
April 5 Received from A, a customer, P500,000, 60-day, 12%
note, dated April 4, in payment of an account.
19 The note of A was discounted with the bank at 14%.
June 7 Received notice from the bank that the note of A was not
paid on maturity. Paid bank the amount due plus protest
fee and other charges of P20,000.
15 Received a 60-day, 12% note, P800,000, date June 15,
from D, a customer for sale of merchandise.
18 Received full payment from A including interest of 12%
on total amount due from maturity date of original note.
Required:
a. What is the journal entry to record the April 19 transaction, assuming the
discounting of note is accounted for as a conditional sale with recognition of
contingent liability?
b. How much was collected from the customer on June 18?
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13. The Hinoba-an Department Store wishes to discount two notes receivable arising from the
sale of merchandise in order to meet some maturing obligations. Both notes have a face
amount of P50,000 each and are due in one year. Note A is a non-interest bearing note
while Note B is to be paid with an interest of 12%. The bank rate in discounting notes is
12%. Assuming that the notes were discounted ten months prior to maturity, the
proceeds from both notes discounted is
14. On May 17, Sagay Co. accepted a P6,500, 8%, 90-day note from a customer. On June 11,
the note was discounted at 10%. At maturity date, the note was dishonored and the bank
charged a P25 protest fee. The amount that Sagay Co. would debit to Notes Receivable
Dishonored is:
15. On April 1, 2019, Ranjid Company discounted with recourse a 9-month, 10% note dated
January 1, 2019 with face of P6,000,000. The bank discount rate is 12%. The discounting
transaction is accounted for as a conditional sale with recognition of contingent liability. On
October 1, 2019, the maker dishonored the note receivable. The entity paid the bank the
maturity value of the note plus protest fee of P50,000. On December 31, 2019, the entity
collected the dishonored note receivable in full plus 12% annual interest on the total
amount due.
Required:
a. What amount was received from the note receivable discounting on April 1, 2019?
b. What amount should be recognized as loss on note receivable discounting?
c. What is the total amount collected from the customer on December 31, 2019?
d. If the discounting is secured borrowing, what is the journal entry to record the
discounting transaction?
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THEORIES 6. Which of the following is used to account for probable sales discounts, sales returns and
sales allowances?
a. Due from factor
1. Why would an entity sell accounts receivable to another entity?
b. Recourse liability
a. To improve the quality of credit granting process
c. Both a and b
b. To limit its legal liability
d. Neither a nor b
c. To accelerate access to amount collected
d. To comply with customer agreements
7. The note receivable discounted account is reported as
a. Contra asset account for the proceeds from the discounting transaction
2. If accounts receivable are pledged against borrowing, the amount of accounts receivable
b. Contra asset account for the face amount of the note
pledged shall be
c. Liability account for the proceeds from the discounting
a. Excluded from total receivables with disclosure
d. Liability account for the face amount of the note
b. Exclude from total receivables without disclosure
c. Included in total receivables with disclosure
8. If a note receivable is discounted without recourse
d. Included in total receivables without disclosure
a. The contingent liability may be disclosed in either a contract account to note
receivable or in a note to the financial statements
3. It is a financing arrangement whereby one party formally transfers its rights to an
b. Liability for note receivable discounted shall be credited
accounts receivable to another party in consideration for a loan.
c. Note receivable shall be credited
a. Pledge
d. The transaction shall be accounted for as a secured borrowing as opposed to a sale
b. Assignment
c. Factoring
9. If financial assets are exchanged for cash and other consideration but the transfer does
d. Discounting
not meet the criteria for a sale, the transferor and the transferee should account for the
transaction as
4. When the accounts receivable are sold outright, the accounts receivable have been
a. Secured borrowing
a. Pledged
b. Pledge of collateral
b. Assigned
c. Both a and b
c. Factored
d. Neither a nor b
d. Collateralized
10. An entity transferred financial asset to another entity. The transfer meets the conditions to
5. When an entity factored accounts receivable without recourse with a bank, the transaction
be accounted for as a sale. The transferor should do each of the following, except
is best described as
a. Remove the asset sold from the statement of financial position
a. Bank loan collateralized by the accounts receivable
b. Record the asset received and liability incurred as proceeds from the sale.
b. Bank loan to be repaid by the proceeds from the accounts receivable
c. Measure the asset received and liability incurred at cost
c. Sale of the accounts receivable to the bank, with risk of uncollectible accounts
d. Recognize any gain or loss on the sale
retained by the entity
d. Sale of the accounts receivable to the bank, with the risk of uncollectible accounts
transferred to the bank

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