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Receivables and Revenue

Overall

Receivables are financial assets representing claims to cash from third party customers.

As they are financial assets, if, just for fun, one asks an AI robot about receivables, one may get this answer.

Receivables are financial assets that represent amounts owed to a company by customers or other parties. Under IFRS, receivables are classified based on the business model and the characteristics of the financial asset. IFRS 9 requires companies to assess whether the receivables meet the Solely Payments of Principal and Interest (SPPI) test and whether they are held within a "hold to collect" business model. If both conditions are met, they are measured at amortized cost; otherwise, they may be measured at fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVTPL).

Under US GAAP, receivables are classified based on their legal form. They generally fall under ASC 310 (Receivables) or ASC 320 (Investments – Debt and Equity Securities). Receivables can be classified as:

  • Held for investment, measured at amortized cost.
  • Held for sale, measured at the lower of cost or fair value.
  • Fair value option, where companies elect to measure them at fair value.

The classification differences between IFRS and US GAAP drive subsequent measurement differences, affecting financial reporting and decision-making.

Nice to know, but not particularly useful if one wants to account for a credit sale to a customer.

So, if one is actually referring to claims to cash arising from contracts with customers tied to the delivery of goods or rendering of services, one is better off using terms such as trade accounts, trade receivables, accounts receivable or, if one wants to be extra pedantic, trade accounts receivable.

While receivables are usually claims against third parties, at larger entities they may represent claims against subsidiaries, affiliates or other entities in a group (e.g. joint venture or joint operation).

While these receivables should be recognized and measured in the same way as third-party receivables, they are eliminated in consolidation (even though they may be reported in individual financial reports)

As keeping track of these items is important, the COAs on this page have a separate section devoted specifically to intercompany transactions and balances.

As such, this page addresses both the accounting for receivables and revenue recognition simultaneously.

With respect to revenue recognition, the two key issues are timing and amount.

Both of these are discussed on this page.

However, as the timing of revenue recognition coincides with the timing of inventory derecognition, an additional discussion of this issue is provided on the inventory page.

Besides receivables, an entity may also recognize contract assets.

The distinguishing feature, while receivables are "unconditional," contract assets are not.

Depending on perspective, this statement is either clear or misleading.

As stated in IFRS 15.108 | ASC 606-10-45-4 (edited): a right to consideration is unconditional if only the passage of time is required before payment of that consideration is due.

So there actually is a condition involved. With a receivable, the vendor can sell to a customer under the condition that they give the customer some time to remit payment.

Obviously, not all vendors are willing to submit to this condition and only sell to customers able and willing to pay cash on delivery.

IFRS 15 | ASC 606 distinguishes between receivables (above) and contract assets in that IFRS 15.107 | ASC 606-10-45-7 (edited, emphasis added) states: If an entity performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, the entity shall present the contract as a contract asset..."

When introduced, this guidance caused some confusion. For example, one of our clients called in a panic because his company accounted for projects using percentage-of-completion (specifically cost-to-cost) accounting, and accounts such as contract in progress, billings, and recognized income. The new standard, however, required over time and contract assets. This would require a complete redesign of their accounts and hundreds, if not thousands, of man-hours.

Grr. Arg.

Fortunately, IFRS 15 | ASC 606 did not change POC accounting, just described it using updated terminology.

Thus, a "contract asset" is the difference between the contract in progress account(s) (including recognized income) and the billings account(s), if the difference is positive. If the difference is negative, a deferred revenue liability is reported instead.

Why did IFRS 15 | ASC 606 not say so in the first place?

Where is the fun in that?

Most importantly, trade receivables are the balancing item for revenue.

Trade receivables and revenue are inextricably linked. As the latter is significantly more important to financial statement users, the primary guidance for receivables comes from IFRS 15 not IFRS 9. Similarly, in US GAAP, it is ASC 606, even though receivables have their own, stand-alone topic (ASC 310).

This also implies, it is not possible to discuss receivables without, at the same time, discussing revenue recognition, both its timing and amount. As a corollary, revenue recognition, inventory derecognition and cost of sales are also intertwined. For this reason, the next page not only discusses these two issues, but also includes a section on revenue recognition timing.

Goods (point of time)

Credit sale

1/1/X1, XYZ delivered 10 units of product #123 to ABC and issued invoice #456 payable in 30 days. Product #123 costs 500 to produce and commonly sells for 1,000 per unit.

Dr/Cr

1/1/X1 / 1.1.X1

 

 

Trade receivable: ABC: #456

10,000

 

Cost of goods sold

5,000

 

 

Revenue

 

10,000

 

Inventory: Finished goods: #123

 

5,000


1/31/X1 / 31.1.X1

 

 

Cash

10,000

 

 

Trade receivable: ABC: #456

 

10,000


Cash and charge card sales

1/1/X1, XYZ sold merchandise for 1,000 to a customer who paid cash.

Dr/Cr

1/1/X1 / 1.1.X1

 

 

Cash

1,000

 

Cost of goods sold

500

 

 

Revenue

 

1,000

 

Inventory: Merchandise

 

500


Same facts except the customer paid with a credit card. Credit card sales clear in two days.

1/1/X1 / 1.1.X1

 

 

Receivable from bank: Credit card sales

987

 

Cost of goods sold

500

 

Selling expenses: Credit card fees

3

 

 

Revenue

 

1,000

 

Inventory: Merchandise

 

500


1/3/X1 / .1.X1

 

 

Cash

987

 

 

Receivable from bank: Credit card sales

 

987


Same facts except the customer paid with a debit card. Debit cards are subject to lower charges and clear the same day. XYZ uses a separate bank account (#123) for debit card sales.

1/1/X1 / 1.1.X1

 

 

Cash: Account 123

988

 

Cost of goods sold

500

 

Selling expenses: Debit card fees

2

 

 

Revenue

 

1,000

 

Inventory: Merchandise

 

500


Services (point of time vs. over time)

Text only

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