Session11’ Accounts’Receivable’my.liuc.it/MatSup/2013/A86045/Slides Session 11.pdfAccounts...

A86045 Accoun,ng and Financial Repor,ng (2013/2014)

Session 11 Accounts Receivable

Paul G. Smith B.A., F.C.A.

SESSION 11 OVERVIEW

A 86045 Accoun,ng and Financial Repor,ng 2

Course Objec,ves -‐ Reminder


At the end of this course students will be able to: •  Read and interpret financial statements of companies applying interna:onal accoun:ng standards

•  Iden,fy and evaluate the impact on a companies accounts of alterna:ve accoun:ng methods

•  Assess the economic-‐ financial posi:on of a company.

Course Overview – Where we are


1. Financial repor,ng under IFRS 13. Review

2. Financial analysis 14. Financing including leases

3. Review 15. Review

4. Revenues 16. Taxa,on (direct and indirect)

5. Costs and expenses 17. Review

6. Intangible assets 18. Group accounts

7. Tangible assets 19. Business combina,ons

8. Impairment of assets 20. Review

9. Review 21. Cash Flow Statement

10. Inventories 22. Review

11. Accounts receivable 23. Fair value

12. Non-‐financial liabili,es 24. Review

Mid-‐term test

Session 11 Overview Mins

Session overview and objec,ves 5

Review of pre-‐work and session 10 recap 5

Defini,ons 10

Fair value – discoun,ng, foreign currencies 10

Allowances (discounts, returns, bad debts) 15

Factoring and sale of receivables (with/without recourse) 10

Credit risk management and disclosures 5

Class exercises 20

Overview of session 12, required reading and assignment for next session

5

Summary and valida,on 5

90

5 A 86045 Accoun,ng and Financial Repor,ng

Objec,ves of Session


At the end of this session session students will be able to: 1.  Explain how trade accounts receivable are valued

in the balance sheet 2.  Ar:culate the principal deduc:ons that are made

in determining trade accounts receivable 3.  Understand the disclosure requirements rela:ng

to credit risk

SESSION 10 RECAP AND PRE-‐WORK SESSION 11


Recap of Session 10

•  Current Assets – Inventories –  Inventories

•  Permissible valua,on methods –  Raw materials – Work-‐in-‐progress –  Finished goods

•  Lower of cost and market – Construc,on contracts

•  Completed contract method •  Percentage-‐of-‐comple,on method •  Fixed price or cost plus


Overview of Session 11


•  Accounts receivable –  Foreign currencies

•  Valua,on/allowances –  Financial discounts –  Returns –  Bad debts

•  Discoun,ng •  Factoring/sale of receivables (with/without recourse) •  Credit Risk Disclosures •  Another exercise ( if ,me allows)

Session 11 Pre-‐work

•  Reading – Wiley Financial Repor,ng Under IFRS a Topic Based Approach: •  Chapter 3 – Current Assets

–  IASB Statements •  IFRS 7 Financial Instruments: Disclosures

•  Research –  Iden,fy the disclosures in your chosen company in respect of accounts receivable and management of credit risk.


DEFINITIONS


Trade accounts receivable


Defini,on – Trade accounts receivable are amounts invoiced to and due from customers for goods and services provided. They are covered by the defini,on of a financial instrument and should be recorded at their fair value which is normally the amount at which they are ini,ally recorded (unless extended credit terms have been granted in which case they should be discounted) less any impairment allowances.

Uncondi:onal receivables and payables are recognized as assets or liabili:es when an en:ty becomes party to the contract and, as a consequence, has a legal right to receive or a legal obliga:on to pay cash. (IAS 39 AG35(a), IFRS 9 B3.1.2(a)) Loans and receivables are measured at amor:zed cost using the effec:ve interest rate method and are subject to review for impairment (IAS 39.46,56)

FAIR VALUE


Fair Value -‐ discoun,ng


If I have €100 today and the interest rate is 7% then in one years ,me this will be worth €107 i.e.. (100 + (100x7/100))

If I have €100 today and the interest rate is 7% then in two years ,me this will be worth €114.49. i.e.100 + ((100x7) 2/100)

Conversely if I will receive €100 in one years ,me and the interest rate is 7% then this will be worth only €93.45 today i.e. (100/(100x7/100)).

If I will receive €100 in two years ,me and the interest rate is 7% the this will be worth only €87.34 today i.e.100/((100x7) 2/100)

In prac:ce, because of materiality, this is generally only done for extended payment terms beyond 12 months.

Future value Present value

Sale of goods in foreign currency

2. a) On September 30, 20X0 the company sells 50,000 units of product X to a customer in the USA at $10 each i.e. $500,000. b) It records this transac,on in € at the exchange rate at the ,me of the transac,on i.e. 1.2 or €416,666.67. c) At year end, December 31, the balance is s,ll outstanding therefore the company restates the liability at the year end rate i.e. 1.3 or €384,615.38. d) The loss of €32,051.28 is debited to the income statement.

Accounts receivable Sales 416.666,67 32.051,38 416,666.67

Exchange Differences (I/S) 32.051,38

$ €

Sept 30 500.000,00 1,20 416.666,67 Dec 31 500.000,00 1,30 384.615,38

32.051,28


ALLOWANCES


Allowances

•  Cash discounts •  Returns •  Doubhul accounts


Cash discounts


Either Or

Sale for €50,000 due in 30 days but with 2% discount for payment within 15 days

Record with the discount Record without discount

Accounts receivable Sales Accounts receivable Sales 49.000 49.000 49.000 50.000 50.000 50.000

Cash Cash 49.000 50.000

If then customer pays aGer 15 days If customer pays within 15 days

Accounts receivable Sales Accounts receivable Sales 49.000 49.000 49.000 50.000 50.000 1.000 50.000

Cash Financial revenue Cash 50.000 1.000 49.000

Returns


Normally returns should be es,mated at the ,me of sale if the company has a history of accep,ng returns. Depending on the reason for the returns, and the condi,on of the returned products, the item should returned to inventory and valued at the lower of cost and net realizable value.

Accounts receivable Sales 50.000 10.000 10.000 50.000

Inventory COGS 6.000 30.000 30.000 6.000

Assume a company makes a credit sale for €50,000 of goods with a cost of 30,000. The company then agrees to accept the return of goods which it sold for €10,000

Allowance for doubhul accounts receivable


Doubhul accounts Novar,s $m $m

2012 2011

Not overdue 8.584 8.967 Past due for not more than one month 552 498 Past due for more than one month but less than three months 321 295 Past due for more than three months but less than six months 301 249 Past due for more than six months but less than one year 205 228 Past due for more than one year 305 305 Provisions for doubhul trade receivables -‐217 -‐219

10.051 10.323

Es,mates of the required allowance is normally based on an ageing of trade accounts receivable and taking into account any credit insurance that the company might have. The company may calculate a specific and/or generic allowance.

Allowance example


Accounts receivable, gross 62,3 75,4 60,3 80,0 -17,7Reserves for mark-down -1,3 -2,2 -1,1 -2,0 0,7Accounts receivable, gross 61,0 73,2 59,2 78,0 -17,0Depreciation on credits -7,4 -7,0 -3,7 -3,6 -3,8Reserves for returns -8,3 -5,8 -6,8 -6,6 -1,7Accounts receivable, net 45,3 60,4 48,7 67,8 -22,5

Q2 FY13€M

Q1 FY13 Q4 FY12 Q3 FY13 vs Q4

Q3 FY13

€/000 % €/000 % €/000 % €/000 %Generic provision 564 12% 544 12% 515 27% 835 44%Specific provision 4 085 88% 3 993 88% 1 416 73% 1 065 56%Subtotal 4 649 100% 4 537 100% 1 931 100% 1 900 100%BDR warranty LRD Guess Italy 2 801 2 442 1 726 1 691 Depreciation on credits 7 450 6 979 3 657 3 591 Coverage on not secured AR (not considering BDR warranty) 18,6% 14,7% 7,2% 6,4%

Q2 FY13 Q1 FY13 Q4 FY12Q3 FY13

Allowance example cont’d


€/000Total At risk % on

total at risk

Total At risk % on total at

risk

Total At risk % on total at

riskCurrent 42 725 17 096 69% 62 306 24 932 81% 68 422 25 829 85%1-30 6 996 1 906 8% 5 171 2 498 8% 2 957 644 2%31-60 3 235 1 301 5% 554 183 1% 894 418 1%61-90 902 - 0% 1 444 762 2% 680 212 1%91-180 3 632 2 305 9% 1 960 791 3% 2 777 947 3%181-360 1 997 998 4% 1 437 688 2% 2 466 1 178 4%Over 1 year 2 808 1 113 5% 2 578 1 004 3% 1 810 1 005 3%Total 62 295 24 718 100% 75 451 30 858 100% 80 006 30 233 100%

Q3 FY13 Q2 FY13 Q4 FY12

€M % €M % €M % €M %Insured 28,5 46% 35,4 47% 25,4 42% 38,3 48%Letters of credit 0,5 1% 0,7 1% 1,1 2% 5,5 7%Bank guarantees 8,3 13% 8,5 11% 7,1 12% 6,6 8%Total secured 37,4 60% 44,6 59% 33,6 56% 50,4 63%Unsecured 24,9 40% 30,9 41% 26,7 44% 29,6 37%Total 62,3 100% 75,5 100% 60,3 100% 80,0 100%

Q2 FY13 Q1 FY13 Q4 FY12Q3 FY13

Accoun,ng for bad debts


Step 1 Step 2 Record the es,mated provision for doubhul accounts Write-‐off bad-‐debts against the provision when certain

Accounts receivablle Allowance for doubhul

accounts Accounts receivablle Allowance for doubhul

accounts 50000 2500 50000 2500 2500 2500

Sales Bad debt expense 50000 2500

FACTORING AND SALE OF RECEIVABLES


Factoring and sale of receivables


Should cash received for a transfer or sale of an asset be recognized as a sale or a liability? The de-‐recogni,on rules of IAS 39 (IFRS 9) are based on the premise that if a transfer of an asset leaves the transferor’s economic exposure to the transferred asset much as if the transfer had never taken place, the financial statements should represent that the transferor s,ll holds the asset.

Derecogni,on flow chart


Consolidate all subsidiaries

Determine whether the de-‐recogni,on principles below are applied to a part or all of an asset or

group of similar assets

Have the rights to the cash flows from the asset expired?

Has the en,ty transferred its rights to receive the cash flows from the assets?

Has the en,ty assumed an obliga,on to pay the cash flows from the asset that meets the condi,ons

in para 3.2.5?

Has the en,ty transferred substan,ally all the risk and rewards?

Has the en,ty retained substan,ally all risks and rewards?

Has the en,ty retained control of the asset?

Con,nue to recognize the asset to the extent of the en,ty’s con,nuing involvement.

Derecognize the asset

Con,nue to recognize the asset



Con,nue to recognize the asset

Yes

Yes

Yes

No

No

Yes

Yes

No

No

Yes

No

No

Factoring

With recourse •  The factor acquires the

trade accounts receivable but the company is liable for any credit losses and must reimburse the factor for these.

•  Trade receivables should not be derecognized and the proceeds should be considered as a liability or loan.

Without recourse •  The factor acquires the

trade accounts receivable and assumes all the collec,on risk.

•  Trade accounts receivable are derecognized and the proceeds are considered as cash.


Factoring: pass-‐through test


Customer Company Factor

Sales/Accounts Receivables

Accounts Receivables sold to factor

Factor provides cash to company

If the company retains the contractual right to receive cash from the customer and assumes a legal obliga,on to pay this to

the factor* Normally the customer pays the factor directly

* All the following condi,ons must be met: a). The en,ty has no obliga,on to pay amounts to the factor unless it collects equivalent amounts from the customer b). The en,ty is prohibited by the terms of the transfer contract from selling or pledging the receivables c). The en,ty has an obliga,on to remit any cash flows it collects on behalf of the factor without material delay. The en,ty is not allowed to reinvest such cash flows except in cash or cash equivalents.

Cap,ve factor

CREDIT RISK DISCLOSURES


Credit Risk Disclosures

QualitaMve disclosures a) The exposures and how they arise b) Its objec,ves, policies and processes for managing risk and the methods used to measure the risk; and c) Any changes in (a) or (b) from the previous period

QuantaMve disclosures •  Concentra,on of credit risk •  Maximum exposure to

credit risk •  Analysis of the age of

financial assets that are past due but not impaired

•  Financial assets individually determined to be impaired


CLASS EXERCISE/EXAMPLES


OVERVIEW, REQUIRED READING AND ASSIGNMENT FOR NEXT SESSION


Overview of Session 12


•  Provisions, con,ngent liabili,es and con,ngent assets – Liabili,es – Provisions – Con,ngent liabili,es

•  Restructuring provisions •  Onerous contracts •  Con,ngent assets

Session 12 Pre-‐work

•  Reading – Wiley Financial Repor,ng Under IFRS a Topic Based Approach: •  Chapter 4 – Non-‐financial liabili,es

–  IASB Statements •  IAS 37 Provisions, Con,ngent liabili,es and con,ngent assets.

•  Research –  Iden,fy the disclosures in your chosen company in respect of con,ngent assets and liabili,es. Be prepared to illustrate these to the next class


SUMMARY AND VALIDATION


Summary of Session 11


•  Accounts receivable –  Discoun,ng –  Foreign currencies

•  Valua,on/allowances –  Financial discounts –  Returns –  Bad debts

•  Factoring/sale of receivables (with/without recourse) •  Credit Risk Disclosures •  Another exercise ( if ,me allows)

Session 11 Valida,on


•  What are the accoun,ng entries for product returns (B/S and I/S)?

•  How do you calculate the allowance for doubhul accounts receivable?

•  What exchange rate is used to value accounts receivable at year end?

•  If payment terms are greater than twelve months what should the seller do?

•  What are the two different types of factoring arrangement and what is the difference?

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