Receivables

CHAPTER 8
 Learning Objectives

1. Describe the common classes of receivables.

2. Describe the accounting for uncollectible
receivables.
3. Describe the direct write-off method of accounting
for uncollectible receivables.
4. Describe the allowance method of accounting for
uncollectible receivables.
5. Compare the direct write-off and allowance
methods of accounting for uncollectible accounts.
 Learning Objectives

6. Describe the accounting for notes receivable.

7. Describe the reporting of receivables on the statement
of financial position.
8. Describe and illustrate the use of accounts receivable
turnover and number of days’ sales in receivables to
evaluate a company’s efficiency in collecting its
receivables.
 Classification of Receivables
應收帳款的分類

Accounts receivable are normally expected to be

collected within a relatively short period, such as 30 or
60 days.
 Classification of Receivables

Notes receivable are amounts that customers owe for

which a formal, written instrument of credit has been
issued.
應收票據，客戶欠款的正式、書面的信用工具。
 Classification of Receivables

 Other receivables expected to be collected within

one year are classified as current assets. If collection is
expected beyond one year, these receivables are
classified as noncurrent assets and reported under the
caption Investments. Examples of other receivables
include: 其它應收款項
 Interest receivable 應收利息
 Taxes receivable 應收稅款
 Receivables from officers or employees 主管或員工應收款
 Uncollectible Receivables

 Companies often sell their receivables to other

companies. This is called factoring the receivables,
and the buyer of the receivables is called a factor.
 factoring應收帳款出售、融資
 Factor 應收帳款管理商
 Uncollectible Receivables

Regardless of how careful a company is in granting

credit, some credit sales will be uncollectible. The
operating expense recorded from uncollectible
receivables is called bad debt expense, uncollectible
accounts expense, or doubtful accounts expense.
應收帳款無法收現—壞帳費用bad debt expense
 Uncollectible Receivables

 Some indications that an account may be uncollectible

include the following應收帳款無法收現指標:
 The receivable is past due. 過期未收現
 The customer does not respond to the company’s attempts to
collect.客戶未回覆
 The customer files for bankruptcy.客戶申請破產
 The customer closes its business.客戶停止營業
 The company cannot locate the customer.無法找到客戶
 Uncollectible Receivables
 The direct write-off method of accounting for uncollectible
receivables records bad debt expense only when an
account is determined to be worthless.
 平時，決定特定客戶帳款無法收現時，直接沖銷特定應收帳款，並承認費用。
非IFRS Bad Debt Expense $xxx
Accounts Receivable—xx Corp. $xxx

 The allowance method 備抵法 records bad debt expense by

estimating uncollectible accounts at the end of the
accounting period. Allowance for Bad Debt」。NRV的概念

 期末時的調整分錄，設立「Allowance for Bad Debt,備抵壞帳」與「Bad Debt

Expends, 壞帳費用」, 為IFRS
Bad Debt Expense $xxx
Allowance for Bad Debt $xxx
 Direct Write-Off Method直接沖銷法

 On May 10, a $4,200 account receivable from D. L.

Ross has been determined to be uncollectible.
 壞帳發生時
 Direct Write-Off Method

The account written off on May 10 is later collected

on November 21. 沖銷後，又收現。

Reinstatement
entry
迴轉原沖銷分錄
Receipt of
cash entry
Example Exercise 8-1
Direct Write-Off Method

Journalize the following transactions, using the direct write-off method of accounting
for uncollectible receivables:
July 9 Received $1,200 from Jay Burke and wrote off the remainder owed of
$3,900 as uncollectible.

Oct. 11. Reinstated 回復the account of Jay Burke and received $3,900 cash in full
payment.
 Follow My Example 8-1

特定日，特定客戶應收帳款。

July 9 Cash . . . . . . …………… .. . . . . . . . ... ...1,200 收現金額

Bad Debt Expense . . . . . . . . . .. . . … 3,900 壞帳金額
Accounts Receivable—Jay Burke . . . . . . 5,100
部分收現、部分壞帳，沖銷應收帳款。

Oct. 11 Accounts Receivable—Jay Burke … 3,900

Bad Debt Expense . . . . . . . . . . . . . . . . . . 3,900
沖銷帳款迴轉

11 Cash . . . . . . . . . . . . . . . . . . . . . . ... .. . . . 3,900

Accounts Receivable—Jay Burke . . . . …. 3,900
帳款收現後收現
 The Allowance Method備抵法提列壞帳
 On December 31, ExTone Company estimates that a
total of $30,000 of the $200,000 balance of their
accounts receivable will eventually be uncollectible.
 (期末，整體估計無法收現，非特定客戶帳款。)

The specific customer accounts 特定客戶帳款 cannot be

decreased, so a contra account 抵銷科目,
Provision/Allowance for Doubtful Accounts, is
credited.
 The Allowance Method

 The net amount that is expected to be collected,

$170,000 ($200,000 – $30,000), is called the net
realizable value (NRV) of the receivables. The
adjusting entry reduces receivables to the NRV and
matches uncollectible expenses with revenues.
 Carrying amount (帳列金額)調整至NRV.
 The Allowance Method
 On January 21, John Parker’s account of $6,000 is
written off because it is uncollectible. 特定客戶無法收現

Note that the allowance account credited

earlier is debited at the write-off, not Bad Debt
Expense.
 The Allowance Method

期末，提列備抵壞帳。

實際發生特定客戶壞帳時，
沖銷備抵壞帳。
 The Allowance/Provision Method

 During 2014, ExTone Company writes off $26,750 of

uncollectible accounts, including the $6,000 account of
John Parker. After posting all entries to write off
uncollectible amounts, Provision for Doubtful
Accounts will have a credit balance of $3,250
($30,000 – $26,750).

調整前
 The Allowance Method
If ExTone Company had written off $32,100 in accounts
receivable during 2014, Provision (Allowance) for
Doubtful Accounts would have a debit balance of $2,100.
借/貸方的餘額

期末調整前借餘，壞帳低估的金額
沖銷金額(實際壞帳)簿 $32,100 > 上期末估計壞帳金額 $30,000
使”Provision for Doubtful Accounts備抵壞帳” 產生借餘(Debit Balance)。
表示原來低估無法收現的壞帳金額。
 The Allowance Method
Nancy Smith’s account of $5,000, which was written off
on April 2, is collected later on June 10. Two entries are
needed: one to reinstate Nancy Smith’s account and a
second to record receipt of the cash.
沖銷後又收現

Reinstatement
entry

Receipt of
cash entry
Example Exercise 8-2
Allowance Method

Journalize the following transactions, using the allowance

method of accounting for uncollectible receivables.

July 9 Received $1,200 from Jay Burke and wrote off the
remainder owed of $3,900 as uncollectible.

Oct. 11. Reinstated the account of Jay Burke and received

$3,900 cash in full payment.
Follow My Example 8-2

July 9 Cash . . . . . . . . . . . . . . . . .. . . . . . . . ... 1,200

Provision for Doubtful Accounts…. . 3,900
Accounts Receivable—Jay Burke . . . 5,100

Oct. 11 Accounts Receivable—Jay Burke . . . 3,900

Provision for Doubtful Accounts. . . . 3,900

11 Cash . . . . . . . . . . . . . . . . . . . . . . ... .. . . 3,900

Accounts Receivable—Jay Burke . . . 3,900
 Estimating Uncollectibles

 The allowance method requires an estimate of

uncollectible accounts at the end of the period. Two
methods are used to estimate the amount debited to
Bad Debt Expense.
 Percent of sales method銷售百分比法

 Analysis of receivables method帳款分析法

 Percent of Sales Method

If ExTone Company’s credit sales for the period are

$3,000,000 and it is estimated that 3/4% will be
uncollectible, Bad Debt Expense is debited for $22,500
($3,000,000 x .0075). This approach disregards the
balance of $3,250 in the allowance account before the
adjustment. 估計壞帳金額，不考慮備抵壞帳的期初
餘額
 Percent of Sales Method

 After the following adjusting entry on December 31 is

posted, Provision for Doubtful Accounts will have a
balance of $25,750 ($3,250 + $22,500).
Percent of Sales Method
Example Exercise 8-3
Percent of Sales Method

At the end of the current year, Accounts Receivable has a

balance of $800,000; Provision for Doubtful Accounts
has a credit balance of $7,500; and net sales for the year
total $3,500,000. Bad debt expense is estimated at 12 of
1% of net sales.
Determine (a) the amount of the adjusting entry for
uncollectible accounts; (b) the adjusted balances of
Accounts Receivable, Provision for Doubtful Accounts,
and Bad Debt Expense; and (c) the net realizable value of
accounts receivable.
Follow My Example 8-3

a. $17,500 ($3,500,000 × 1% × 1/2)

Adjusted Balance
b. Accounts Receivable . . . .. . . . . . . .. . . . . . . . $800,000
Provision for Doubtful Accounts ($7,500+$17,500) 25,000
Bad Debt Expense . . . . . . . . . . . . . . . ….. . . . . . 17,500

c. $775,000 ($800,000 – $25,000)

Percent of Sales Method
 Analysis of Receivables Method

The longer an account receivable is outstanding, the less

likely it is that it will be collected. Basing the estimate of
uncollectible accounts on how long specific amounts
have been outstanding is called aging the receivables.
帳齡分析法
 Analysis of Receivables Method

 The analysis of receivables method is applied as

follows:
 Step 1: The due date of each account receivable is determined.
帳戶到期日
 Step 2: The number of days each account is past due is
determined.過期日數
 Step 3: Each account is placed in an aged class according to
its days past due.帳齡類別
 Step 4: The totals for each aged class are determined.每一帳
齡類別的總數
 Analysis of Receivables Method

 Step 5: The total for each aged class is multiplied by an

estimated percentage of uncollectible accounts for that class.估計
無法收現百分比
 Step 6: The estimated total of uncollectible accounts is
determined as the sum of the uncollectible accounts for each aged
class.加總各帳齡類別的估計壞帳。
 Analysis of Receivables Method

 The preceding steps are summarized in an aging

schedule, and this overall process is called aging the
receivables.帳齡分析
Analysis of Receivables Method

帳齡分析表
 Analysis of Receivables Method

 The estimate based on the age of receivables is

compared to the balance in the allowance account to
determine the amount of the adjusting entry.
 帳齡分析得到「Allowance/Provision for Doubtful Account備抵
壞(呆)帳」應有的金額。➔ NRV
 與已提列的金額比較，得到應調整的金額。
 Analysis of Receivables Method

 ExTone Company has an unadjusted credit balance調整

前貸方餘額 of $3,250 in Provision for Doubtful
Accounts備抵呆/壞帳. In Exhibit 1, the estimated
uncollectible accounts totaled $26,490. The amount to
be added to the allowance account is $23,240 ($26,490
– $3,250). The adjusting entry is as follows: 額外再提列
 Analysis of Receivables Method
 After the preceding adjusting entry is posted to the
ledger, ExTone Company’s Provision for Doubtful
Accounts will have an adjusted balance 調整後餘額 of
$26,490. This is the amount that was determined by
aging the accounts 帳齡分析.

調整前餘額
+ 調整金額
= 調整後餘額

Same amount as the estimated amount

determined by the aging process.
 Analysis of Receivables Method

If ExTone Company’s unadjusted balance of the

allowance account had been a debit balance of $2,100,
the amount of the adjustment would have been $28,590
($26,490 + $2,100).
Example Exercise 8-4
Analysis of Receivables Method

At the end of the current year, Accounts Receivable has a

balance of $800,000; Provision for Doubtful Accounts has
a credit balance of $7,500; and net sales for the year total
$3,500,000. Using the aging method, the balance of
Provision for Doubtful Accounts is estimated as $30,000.

Determine (a) the amount of the adjusting entry for

uncollectible accounts; (b) the adjusted balances of Accounts
Receivable, Provision for Doubtful Accounts, and Bad Debt
Expense; and (c) the net realizable value of accounts
receivable.
Follow My Example 8-4

a. $22,500 ($30,000 - $7,500)

Adjusted Balance
b. Accounts Receivable . . . .. . . . . . . .. . .. . . . . . $800,000
Provision for Doubtful Accounts… ..……… 30,000
Bad Debt Expense . . . . . . . . . . . . . . . …... . . . . . 22,500

c. $770,000 ($800,000 – $30,000) 估計可收現的 NRV

 Comparing Estimation Methods

ExTone Company

不考慮調整
前餘額
 直接沖銷法 備抵法

特定客戶壞帳發生

特定客戶部分壞帳發生/部分收現

特定客戶壞帳發生後收現

只有實際發生壞帳時，沖銷
應收帳款，並承認壞帳。 年底估計、
提列壞帳
 Comparing Methods
The primary differences between the direct write-off and
allowance methods are summarized below.

直接沖銷法 備抵法
壞帳費用 特定客戶應收帳款無法收現時 年底。銷貨百分比法; 帳齡分析法
備抵壞帳 不使用「備抵壞帳」科目 使用備抵壞帳科目
使用者 小公司 大公司，有大額應收帳款公司
 Characteristics of Notes Receivable

 A note receivable, or promissory note, is a written

document containing a promise to pay.書面支付承諾
Characteristics of a promissory note are as follows:
 The maker is the party making the promise to pay.發票人/
付款人
 The payee is the party to whom the note is payable.受款人
 The face amount is the amount the note is written for on
its face.面額

(continued)
 Characteristics of Notes Receivable

 The issuance date is the date a note is issued.發票日

 The due date or maturity date is the date the note is to be
paid.到期日
 The term of a note is the amount of time between the
issuance and due dates.期間
 The interest rate is the rate of interest that must be paid on
the face amount for the term of the note.票面利率
Notes Receivable
 Notes Receivable

 The maturity value is the amount that must be paid

at the due date of the note, which is the sum of the
face amount and the interest.到期值=面額+利息
 Due Date of a 90-day Note

 What is the due date of a 90-day note dated March 16?

 Days in March 31
 Minus issuance date of note 16
 Days remaining in March 15
 Add days in April 30
 Add days in May 31
 Add days in June 90
(due date of June 14) 14 days
 Term of note 去頭，不去尾 90 days
 Alternate Approach

 Total days in note 90 days

 Number of days in March 31
 Issue date of note, March 16 (16)
 Remaining days in March days 15

 Number of days in April 30

 Number of days in May days 31
 Residual days in June (14) days

Answer: June 14
Due Date of a 90-day Note
 Accounting for Notes Receivable

 Received a $6,000, 12%, 30-day note dated November

21, 2014, in settlement 清償of the account of W. A. Bunn
Company.
 Accounting for Notes Receivable

 On December 21, when the note matures, the firm

receives $6,060 from W. A. Bunn Company ($6,000
face amount plus $60 interest).
 Accounting for Notes Receivable

 If W. A. Bunn Company fails to pay the note on the due

date, it is considered a dishonored 拒付 note
receivable. The note and interest are transferred back
to the customer’s account receivable.
 Accounting for Notes Receivable

 A 90-day, 12% note dated December 1, 2014, is

received from Crawford Company to settle its account,
which has a balance of $4,000.
 Accounting for Notes Receivable

 Assuming that the accounting period ends on

December 31, an adjusting entry is required to record
the accrued interest of $40 ($4,000 × 0.12 × 30/360).
 Accounting for Notes Receivable

 On March 1, 2015, $4,120 is received for the note

($4,000) and interest ($120).
 Example Exercise 8-5
Note Receivable

Same Day Surgery Center received a 120-day, 6% note

for $40,000, dated March 14, from a patient on
account.
a. Determine the due date of the note.
b. Determine the maturity value of the note.
c. Journalize the entry to record the receipt of the
payment of the note at maturity.
Follow My Example 8-5

a. The due date of the note is July 12, determined as follows:

March 17 days (31 – 14)
April 30 days
May 31 days
June 30 days
July 12 days
Total 120 days

b. $40,800 [$40,000 + ($40,000 × 6% × 120/360)]

c. July 12 Cash . . . . . . . . . . . . . . . . . . . ……40,800

Notes Receivable . . . . . . . . . . . 40,000
Interest Revenue . . . . . . . . . . . . 800
Amortized Cost Method for Financial Instruments

 Under IFRS 9 Financial Instruments (金融工具), a

financial asset is measured at amortized cost 攤銷後
成本 if both of the following requirements are met:
1. The asset is held to collect the contractual cash
flows; and 為收取現金
2. The contractual terms of the asset give rise, on specified
dates, to cash flows that are solely payments of principal
and interest on the principal outstanding. 現金=本金加
利息
Trade Receivables—What IFRS Says

 Trade receivables, a financial asset, meet the above

requirements to be measured at amortized cost,
since they are
 held to collect contractual cash flows and
 generally there is no leverage effect in respect of the
amounts collected.
Reporting Receivables on the statement of financial
position
 Accounts Receivable Turnover

 The accounts receivable turnover measures how

frequently during the year the accounts receivable are
being converted to cash. 應收帳款週轉率(次)—一年週轉多次，或
銷貨為平均應收帳款的倍數。
 管理應收帳款的效率。

Accounts Net Sales

Receivable =
Average Accounts
Turnover
Receivable
ACCOUNTS RECEIVABLE TURNOVER
 Number of Days Sales in Receivables

 The number of days’ sales in receivables is an estimate

of the length of time the accounts receivable have been
outstanding.應收帳款收現(週轉)天數

Number of Days’ Average Accounts Receivable

Sales in =
Receivables Average Daily Sales
NUMBER OF DAYS SALES IN RECEIVABLES

應收帳款週轉天數，指公司從產品銷售到獲得客戶付款所需要
的時間（天數)
 Example Exercise 8-6 Accounts Receivable Turnover and
Number of Days’ Sales in Receivables

Financial statement data for years ending December 31 for

Osterman Company are as follows:

2014 2013
Net sales $4,284,000 $3,040,000
Accounts receivable:
Beginning of year 550,000 400,000
End of year 640,000 550,000
Follow My Example 8-6

a. Determine the accounts receivable turnover for 2014 and

2013.
b. Determine the number of days’ sales in receivables for 2014
and 2013. Round to one decimal place.
c. Does the change in accounts receivable turnover and the
number of days’ sales in receivable from 2013 to 2014
indicate a favorable or an unfavorable trend?
Follow My Example 8-6

a. Accounts receivable turnover:

2014 2013
Average accounts receivable:
($550,000 + $640,000)/2 $595,000
($400,000 + $550,000)/2 $475,000
Accounts receivable turnover:
$4,284,000/$595,000 7.2
$3,040,000/$475,000 6.4
Follow My Example 8-6

b. Number of days’ sales in receivables:

2014 2013
Average daily sales:
$4,284,000/365 days $11,737.0
$3,040,000/365 days $8,328.8

Number of days’ sales in receivables:

$595,000/$11,737.0 50.7 days
$475,000/$8,328.8 57.0 days
Follow My Example 8-6

c. The increase in the accounts receivable turnover

from 6.4 to 7.2 and the decrease in the number of
days’ sales in receivables from 57.0 days to 50.7
days indicate favorable trends in the efficiency of
collecting accounts receivable.
Accounting Standards for Receivables
o The accounting standards now associated with receivables are
➢ IAS 32 Financial Instruments,
➢ IAS 39 Financial Instruments: Recognition and Measurement,
➢ IFRS 7 Financial Instruments: Disclosures,
➢ amendments to IFRS 7 and IFRS 9.
o Loans and receivables is a financial asset since it contains a
contractual right to receive cash from another entity.
o Under IAS 39, loans and receivables is one of the four financial
assets categories. The loans and receivables category does not
exist under U.S. GAAP.
o IAS 39 confines loans and receivables to financial assets that are
created by the enterprise by providing money, goods or services
directly to a debtor. Therefore, the following four categories of
loans and receivables do not fall under the category of loans and
receivables under IAS 39.
Loans and Receivables that are Scoped out of
IAS 39
o They are classified as other categories of financial
instruments and treated with different rules of
recognition and measurement.
1. Loans and receivables designated as held at fair value with
gains or loss going through profit or loss;
2. Loans and receivables classified as held for trading;
3. Loans and receivables designated as available for sale;
and
4. Loans and receivables that the holder may not recover
substantially all of its initial investment.
Receivables and Loans

o Accounts receivable and loans to other entities are two

examples of items in the loans and receivables category.
o From the perspective of accounting treatment, U.S.
GAAP does not include trade accounts receivable and
loans receivable in the same category as debt securities.
o Unlike U.S. GAAP, the IFRS for loans and receivables
follows the nature of debt securities.
➢ Under this framework, IAS 39 requires loans and receivables to
be measured initially at fair value.
➢ Valuation changes after the initial purchase are accounted for at
amortized cost using the effective interest method. In contrast,
➢ U.S. GAAP reports receivables at net realizable value and must
separately disclose material related-party receivables.
Receivables and Loans

o Under this definition of loans and receivables,

equity instruments cannot be classified in this
category because the amounts to be received by
the holders vary in a manner that is not
predetermined.
o In contrast, preference shares with fixed or
determinable payments and a fixed maturity that
are determined to be financial liabilities for the
issuer can be classified in the category of loans and
receivables provided they are not quoted in an
active market.
➢ Privately issued mandatorily redeemable preference shares
is one example.
Receivables and Loans

o Like other financial assets, loans and receivables

should be reported on the face of the statement of
financial position.
o Loans and receivables are classified as current
assets if they are expected to be realized within
one year or the normal operating cycle, whichever
is longer.
o Otherwise, they are classified as noncurrent assets.
o Companies may further classify receivables as
receivables from trade customers and receivables
from related parties and other amounts.
Uncollectible Accounts Receivable

o IFRS and U.S. GAAP have similar requirements in

treating uncollectible accounts receivable. They both
use the allowance method. Under this method, entities
estimate the amount of expected uncollectible
accounts.
o The estimate of uncollectible amount is debited to the
bad debt expense account and credited to the
provision for bad debt account (or allowance for bad
debt under U.S. GAAP).
o Collection of accounts receivable previously written off
is also similarly treated under U.S. GAAP and IFRS.
The only difference for uncollectible accounts
receivable between the two standards is only in
terminology.
Uncollectible Accounts Receivable

➢ Example: ABC Co. estimates that 2% of credit sales will be

uncollectible. Assuming the company uses the allowance
method and sales are $1,000,000, the company will record
the following entry under IFRS.
Bad Debt Expense $20,000
Provision for Bad Debts $20,000
Impairment

o IAS 39 requires entities to assess whether its financial

assets are impaired. In the case that a portion of
accounts receivable is impaired, the reporting entities
should recognize the impairment loss, measured as
the difference between the asset’s carrying value and
the present value of expected future cash flows
discounted at the asset’s original effective interest rate.
o In recognizing uncollectible amount, an entity can
choose to either directly write down receivables or
through a contra provision account. The amount of the
loss is recognized as profit or loss.
o As with other asset impairments, a reversal of
impairment losses is allowed if there is objective
evidence that justifies the reversal. Reversal of an
impairment loss is recognized as profit and loss.
Impairment

o U.S. GAAP has similar accounting treatments of

impairment loss for financial assets. However, U.S.
GAAP recognizes the uncollectible amount
through an provision account and a direct write-
off is not allowed. In addition, a reversal of
impairment losses is not allowed under U.S. GAAP.
Derecognition of Receivables (Amendment to
IFRS 7)
o The conceptual requirements for the sale of
receivables are similar under IFRS and U.S. GAAP.
However, the derecognition model differs between
IFRS and U.S. GAAP.
o Derecognition of financial assets under IFRS is
first based on a test of risk and rewards and
subsequently, a test of control.
Derecognition of Receivables (Amendment to
IFRS 7)
o In particular, an entity may derecognize a
financial asset when any of the following
conditions are met:
1. The rights to the cash flows from the financial asset expire;
2. The rights to the asset’s cash flows and substantially all
risks and rewards of ownership are transferred;
Derecognition of Receivables (Amendment to
IFRS 7)
3. An entity has not transferred the contractual rights but it
assumes an obligation to transfer the asset’s cash flows,
transfers substantially all risks and rewards. In particular,
it meets the following conditions:
a) The entity has no obligation to pay cash flows unless
equivalent cash flows have been collected from the
transferred asset;
b) The entity is prohibited from selling or pledging the asset
besides as security to future recipients for the obligation to
pass through cash flows; and
c) Cash flows must be remitted without material delay.
4. Control of the asset is transferred even though
substantially all of the risks and rewards are neither
transferred nor retained.
Derecognition of Receivables (Amendment to
IFRS 7)
o U.S. GAAP derecognizes financial assets based on
a control test. Under U.S. GAAP, a transaction is a
sale and a receivable is derecognized if control of
that receivable is transferred from the seller to the
buyer.
Classification of Financial Assets under IAS 39
and IFRS 9
o Loans and receivables is one of the four categories of
financial instruments under IAS 39: (1) Financial
assets at fair value through profit or loss (FVTPL), (2)
Available-for-sale financial assets (AFS), (3) Loans
and receivables (LR), and (4) Held-to-maturity
investments (HTM).
o The classification is used to determine the initial
recognition and subsequent measurement for a
particular financial asset.
o The classification is not based wholly on the
measurement methods. Instead, the classification
mixes a firm’s business models of financial
instruments and measurement methods, creating
confusions when accounting for financial instruments.
Classification of Financial Assets under IAS 39
and IFRS 9
o For instance, FVTPL refers to a valuation method
for the classification while the LR category refers
to non-derivative financial assets with fixed or
determinable payments that are not quoted in an
active market, which is not a valuation method.
Similarly, HTM and ASF refer to the payment
pattern and the intent of the company to hold the
assets. Neither of them is related to a valuation
method.
Classification of Financial Assets under IAS 39
and IFRS 9
o Classification for measurement is a foundation for
accounting standards. Based on this principle and the
issues from IAS 39, IFRS 9 Financial Instruments classifies
financial assets by measurement methods.
o In particular, IFRS 9 classifies financial assets into two
categories on the basis of measurement methods—
amortized cost and fair value.
o This classification by itself refers to the measurement
method, further clarifying the measurement methods for
financial assets.
o Loans and receivables under IAS 39 generally refer to trade
receivables (accounts or notes receivable) created from
selling merchandises on account. In this chapter, we focus
on application of amortized cost to the trade receivables
from sale transactions.
Classification of Financial Assets under IAS 39
and IFRS 9
o According to IAS 39 and IFRS 9, loans and
receivables are measured at amortized cost using
the effective interest rate method.
o The effective interest rate is the implied discount
rate under which the discounted value of
estimated future cash payments or receipts is
equal to the net carrying amount.
o Subsequent downward revisions or upward
revision in estimated cash flows are subject to
impairment write-downs.
Example for Accounts Receivable under
Amortized Cost
Company A makes sales of $200,000 on February 1,
2013 on account. The trade receivables will be due on
April 30, 2013. Based on past experience and current
information, the company estimates 3% of trade
receivables will be uncollectible.
Accounts Receivable under Amortized Cost

The journal entries for initial recognition and

measurement are as follows:
(a) Initial recognition and measurement
2013/02/01 Accounts Receivable $200,000
Revenues $200,000
Recognize revenue and trade receivables
Revenues $6,000
Provision for Bad Debts $6,000
Recognize a write-down for value impairment in accounts
receivable.
Accounts Receivable under Amortized Cost
(b) Derecognition and reversal of write-down
As the market situation improves, on April 30, 2013, the company
revises estimated loss rate of accounts receivable to 2%. That is, the
loss provision account should have a value of $2,000. At that day,
the actual carrying amount in the provision account is $3,000.
Therefore, we make an adjusting entry for the reversal of write-
down to reflect the present value of the trade receivable and a
balance of $2,000 for provision for bad debt.
2013/04/30 Provision for Bad Debts $2,000
Write-Down Expense for
Trade Receivable
$2,000
Make reversal entries for upward adjustment of the estimated loss
rate of accounts receivable.
Cash $196,000
Accounts Receivable
$196,000
Recognize the receipt of estimated cash flows.
Accounts Receivable under Amortized Cost

(c) Write off of provision accounts that are

determined to be uncollectible.
2014/04/30 Provision for Bad Debts $4,000
Accounts Receivable $4,000
Assume that the unpaid trade receivables are determined to
be uncollectible one year after they become due.