Tài chính doanh nghiệp - Chapter 8: Receivables

ReceivablesRevsine/Collins/Johnson/Mittelstaedt: Chapter 8McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.Learning objectivesHow to account for accounts receivable using net realizable value.How to analyze accounts receivable under net realizable value accounting.How to spot whether or not reported receivables arose from real sales.How and why interest is recorded on “non-interest bearing” notes.How to account for accounts receivable and notes receivable using the fair value option.How companies use receivables to accelerate cash inflows and how this affects financial statement ratios.8-*Learning objectives (cont.)Why receivables are securitized and how this affects financial statement ratiosWhy receivables are restructured when a customer experiences financial difficulty and how to account for the troubled-debt restructuring.The key differences between current GAAP and IFRS requirements for receivable accounting and possible changes.8-*Accounts receivable:Assessing net realizable valueAccounts receivable are generally reflected in the balance sheet at their net realizable value.Two things must be estimated to determine the net realizable value of receivables:Uncollectibles—the amount that will not be collected because customers are unable to pay.Returns and allowances—the amount that will not be collected because customers return the merchandise or are allowed a reduction in the amount owed.NRV ofreceivablesGross amount ownedEstimated uncollectiblesEstimated returns & allowances=--8-*Accounts receivable:Why estimating uncollectibles is importantMost companies establish credit policies by weighing the expected cost of credit sales against the benefit of increased sales.This tradeoff illustrates that bad debts are often unavoidable.The matching principle requires that some estimate of uncollectible accounts be offset against current period sales.Customer collection and billing costs plus potential bad debtsTodaySome future datesTime$10,000 current period sales$500 is uncollectible$500 estimated expense8-*Accounts receivable:Sales revenue approachBristol Corporation estimates that bad debt losses arising from first quarter 2011 sales are expected to be $30,000.DR Bad debt expense $30,000 CR Allowance for uncollectibles $30,000A contra-asset account subtracted from gross accounts receivableIf Bristol’s gross accounts receivable and allowance for uncollectibles before recording this bad debt entry were $1,500,000 and $15,000, then after the entry the balance sheet would show:8-*Accounts receivable:Sales Revenue approach8-*Accounts receivable:Gross receivable approachManagement believes that 3% of existing gross receivables will ultimately be uncollectibleNotice this second step8-*Accounts receivable:Do existing receivables represent real sales? Reasons why receivables might grow faster than sales: Change in credit policy.Deteriorating credit worthiness among existing customers.Firm has changed its financial reporting policy – accelerated revenue recognition.ReceivablesSalesTime8-*The Fair Value OptionBristol CorporationRecall that Bristol Corporation reports a net realizable value of $1,455,000 (gross receivables of $1,500,000 minus allowance for uncollectibles of $45,000).Assume that there is an active market for these types of receivables and that the price is 95% of face value, or $1,425,000. To adjust the receivable’s carrying value to fair value, the difference between the fair value and the face amount of the receivable is recognized as an unrealized loss on the income statement as follows: An asset valuation account that is adjusted upward or downward as fair values change8-*Accelerating cash collections:Sale and collateralized borrowingThere are two ways to accelerate cash collections:Companies might want to accelerate cash collection: (1) to avoid processing and collection costs; (2) because of a cash flow imbalance between supplier payments and receivable collections; or (3) to fund an immediate cash need.8-*Accelerating cash collections:Is it a sale or a borrowing?The FASB has provided guidelines in the Accounting Standards CodificationHowever, ambiguities abound.Sale of receivables:Is controlsurrendered?Receivables removed from balance sheetGain or loss recognized in incomeBorrowing againstreceivablesReceivables stay on balance sheetLoan shown as balance sheet liability.No gain or loss recognized in incomeSaleBorrowingAssets are beyond reachBuyer has right to disposeSeller has no obligation to repurchaseYesNo8-*in exchange for cashAccelerating cash collections:A closer look at securitizationsBank forms a bundled portfolio of 7% home mortgage receivables of “moderate” risk.A third-party investor is willing to buy the portfolio at a price that yields a 6% return.Because the selling price at 6% is higher than the carrying value of the mortgages, the bank records a gain.Both the bank and the investor win in this transaction.BankInvestorCustomerReceivables transferredMortgage receivables8-*Troubled debt restructuringWhen a customer is financially unable to make required interest and principal payments, the lender can force the customer into bankruptcy or restructure the loan receivable.The restructured loan can differ from the original loan in several ways:Scheduled interest and principal payments may be reduced or eliminated.The repayment schedule may be extended over a longer time period.The customer and lender can settle the loan for cash, other assets, or equity interests.Restructured loans benefit both the customer and the lender.8-*Troubled debt restructuring:Summary8-*Global Vantage PointComparison of IFRS and GAAP Receivable AccountingIFRS is similar to the accounting under U.S. GAAP – called amortised cost which refers to the gross amount of the receivable and an allowance for doubtful accounts is created.IFRS allows a more limited version of the fair value optionIFRS – firms may elect the fair value option only in cases where it eliminates an accounting mismatch or because a group of assets are managed and evaluated using fair values.GAAPAllows the fair value option for a broader set of transactionsIFRSRequires fair value disclosures for short-term trade receivables and loans in addition to long term notes receivable8-*SummaryGAAP requires that accounts receivable be shown at their net realizable value.Two methods are used to estimate uncollectibles: (1) the sales revenue approach, and (2) the gross accounts receivables approach. In either case, firms still must perform an “aging”.Analysts should scrutinize the allowance for uncollectibles account balance over time.Receivable growth can exceed sales growth for several reasons, including when aggressive revenue recognition practices are being used.8-*Summary continuedIt is sometimes necessary to “impute” the effective interest rate on a note receivable.Firms may elect the fair value option for accounts and notes payable. Changes in fair value are recognized in net income.To accelerate cash collections, firms sometimes transfer or dispose of their receivables. These transactions take the form of factoring (a sale) or collateralized borrowing (a loan).ASC Topic 860 Transfers and Servicing of the FASB Accounting Standards Codification provides guidance for distinguishing between the sale (control is surrendered) and borrowing (control is not surrendered).8-*Summary concludedSubprime loans and securitizations were at the heart of the 2008 economic crisis. Accounting and regulatory reforms are underway to address some of the problems identified during the crisis.Lenders often restructure loans when the customer is unable to make required payments. These troubled debt restructurings involve (a) settlement, or (b) continuation with modification of debt terms.When terms are modified, the precise accounting treatment depends on whether the sum of future cash flows from the restructured note are above or below the original note’s carrying value at the restructuring date. Remember, the interest rate used in accounting for troubled debt restructurings may not reflect the real economic loss suffered by the lender.Both the FASB and the IASB have projects on financial instruments and derecognition.8-*