Universal Chart of Accounts

Additional issues

Consideration paid to the customer

1/1/X1, XYZ paid 6,000 to register itself as ABC's supplier. It also paid a one year listing fee of 4,000 for each of the three products ABC agreed sell in its retail outlets. In return, ABC agreed to purchase a minimum of 12,000 units for 25 each, but estimated total annual sales of 12,000 to 18,000. It shared this estimate with XYZ.

XYZ would not have paid this fee had ABC not agreed to sell its products.

Consequently, XYZ deducted it from revenue rather than expensing it.

That is the gist of the guidance provided by EITF 00-14.

According to EITF 00-14 (later EITF 01-09), when a vendor bought a good or service from a customer, the vendor deducted the purchase price of that good or service from revenue unless the purchased the good or service was unrelated to the sale.

In this example, it would have been pointless for XYZ to pay a listing and slotting fee, rent shelf space, or buy in store advertising had it not sold ABC its products.

Consequently, XYZ deducted the payment from revenue instead of recognizing an expense.

Unfortunately, EITF 00-14 was superseded by ASC 606 which, while it has the advantage of being identical to IFRS 15, does not provide nearly as straightforward guidance.

Previously, IFRS (IAS 18) did not address consideration payable to a customer.

To evaluate a payment as outlined in IFRS 15.70 to 72 | ASC 606-10-32-25 to 27, an entity first considers, as outlined in IFRS 15.71 | ASC 606-10-32-26, whether the good or service is distinct.

As outlined in IFRS 15.27.a | ASC 606-10-25-19.a, a good or service is distinct of the entity can benefit from its on its own (or with readily available resources).

As outlined in IFRS 15.27.b | ASC 606-10-25-19.b, to be distinct, the good or service must also be separately identifiable from other goods and services promised in the contract.

As outlined in IFRS 15.29 | ASC 606-10-25-21, to be separate, the goods and services cannot be (a) inputs to produce or deliver the combined output or outputs specified by the customer, (b) do not significantly modify or customize, or be significantly modified or customized by, another good or service or (c) one be highly interdependent or highly interrelated.

In this example, the listing and slotting fees, shelf space rent, and in store advertising did not meet condition c, so XYZ deducted those payments from revenue as outlined in IFRS 15.72 | ASC 606-10-32-27.

On the other hand, the rent associated with the kiosk was for a stand-alone service and would have been paid to ABC regardless of ABC's buying XYZ's products.

Likewise, the advertising associated with the services sold in that kiosk also had separate, stand-alone value.

Since these payments did meet condition c, they were not deducted from revenue.

XYZ also agreed to pay ABC 1 to slot each unit of each product delivered, 9,000 to rent for the space where ABC would display the products for one year and 5,000 to rent space for a kiosk for one month. It also paid 12,000 to advertise the products and 6,000 the services (sold at its kiosk) in ABC’s in-store handout. Finally, XYZ and ABC agreed to promote XYZ's products on social media for year, sharing the 24,000 cost evenly.

During January, it delivered 1,050 products to ABC and sold services for 19,000 through its kiosk.

Dr/Cr

1/1/X1 / 1.1.X1

 

 

Pre-paid registration fee

6,000

 

Pre-paid listing fee

12,000

 

Pre-paid shelf space arrangement

9,000

 

Pre-paid co-advertising

12,000

 

Pre-paid rent (kiosk)

5,000

 

Pre-paid advertising

18,000

 

 

Cash

 

35,800


1/31/X1 / 31.1.X1

 

 

Receivable: ABC

26,250

 

Cash

19,000

 

Rental expense

5,000

 

Advertising expense

1,500

 

Revenue

4,300

 

 

Revenue (products)

 

26,250

 

Revenue (services)

 

18,000

 

Pre-paid registration fee

 

500

 

Pre-paid listing fee

 

1,000

 

Pre-paid shelf space agreement

 

750

 

Pre-paid co-advertising agreement

 

1,000

 

Pre-paid kiosk rent

 

5,000

 

Pre-paid advertising

 

1,500

 

Cash (slotting fee)

 

1,050


Or simply:

1/31/X1 / 31.1.X1

 

 

Receivable: ABC

25,200

 

Cash

19,000

 

Rental expense

5,000

 

Advertising expense

1,500

 

Revenue

4,300

 

 

Revenue (products)

 

26,250

 

Revenue (services)

 

18,000

 

Pre-paid registration fee

 

500

 

Pre-paid listing fee

 

1,000

 

Pre-paid shelf space agreement

 

750

 

Pre-paid co-advertising agreement

 

1,000

 

Pre-paid kiosk rent

 

5,000

 

Pre-paid advertising

 

1,500


Value added tax

12/14/X1, XYZ purchased material for 5,000 from DEF. 12/15/X1, it sold products, that had cost 6,000 to manufacture, for 10,000 to ABC. In its jurisdiction, the VAT (GST) rate is 21% and the balance must be remitted to the tax collection authority no later than the 24th day of the month following the value adding transaction or event.

Value added tax (VAT) is applied throughout the European Union while Goods and services tax (GST) is applied in countries such as Canada, South Africa or India.

In summary, VAT is a multi-step sales tax paid at each value adding transaction (generally the sale or purchase of goods or services) or event (collection of a cash deposit, for example).

Please note, VAT legislation tends to be fairly complex and varies from one jurisdiction to the next.

Consequently, this summary provides just enough information to make the following example understandable to someone not familiar with VAT.

It should in no way be taken as a substitute for detailed study of pertinent tax legislation.

A "VAT payor" is a company registered with the tax collection authority and is obligated to collect VAT from its customers. If it buys goods or services from another VAT payor, it pays VAT to that company.

At the end of each month, a VAT payor deducts VAT paid (to suppliers) from VAT collected (from customers) and remits (pays) the difference (if VAT paid < VAT collected) to the tax collection authority or claims a refund (if VAT paid > VAT collected).

In some cases, the buyer rather than seller is obligated to remit VAT to the tax collection authority. This is most often the case when transactions cross EU borders / are susceptible to missing trader fraud (a.k.a. MTIC or carousel fraud).

However, as the IFRS | US GAAP accounting treatment for this is obvious, no example is presented.

The last link in the chain, the end consumer or a company that is not a VAT payor (or cannot claim VAT form some other reason) pays VAT to its suppler but has no VAT of its own to deduct.

From an IFRS | US GAAP perspective, the (net) VAT remitted to the tax collection authority is a tax other than income while the VAT collected from customers is an agency account.

This example is based on the VAT legislation of one European Union member state.

Dr/Cr

12/14/X1 / 14.12.X1

 

 

Inventory: Raw material

5,000

 

Tax other than income: VAT

1,050

 

 

Accounts payable: DEF

 

5,000

 

Accrued liabilities: VAT: DEF

 

1,050


The same account is used for the VAT associated with both purchases and sales in that its balance is reported as either an asset or a liability (until refunded by / remitted to the taxation authority).

It is also important to note that, since the VAT paid to vendors is refundable, it cannot be included in the measurement of assets or expenses. Instead, the amount remitted by / refunded to a VAT payor is presented on its profit and loss statement as a tax other than income / refund of a tax other than income.

As good accounting is symmetrical, VAT paid to vendors is recognized separately from both expenses and payables in the same way VAT received from customers is recognized separately from revenue and receivables.

12/15/X1 / 15.12.X1

 

 

Trade receivables: ABC

10,000

 

Accrued assets: VAT: ABC

2,100

 

Cost of goods sold

6,000

 

 

Revenue

 

10,000

 

Tax other than income: VAT

 

2,100

 

Inventory: Finished goods

 

6,000


Under IFRS and US GAAP, revenue is clearly measured net of VAT.

IFRS 15.47 | ASC 606-10-32-2 state: ... The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties ...

While IFRS 15.47 | ASC 606-10-32-2 does not mention VAT by name, it clearly alludes to it, which becomes clear when the reasoning behind the paragraph is examined.

In IFRS 15 BC187 | ASC 606 BC187 the boards state: The boards also clarified that the amounts to which the entity has rights under the present contract can be paid by any party (ie not only by the customer). ... However, it would not include amounts collected on behalf of another party such as some sales taxes and value added taxes in some jurisdictions.

Likewise, in IFRIC 21.BC6 the IFRIC states: ... Amounts that are collected by entities on behalf of governments (such as value added taxes) and remitted to governments are not outflows of resources embodying economic benefits for the entities that collect and remit those amounts. ...

Further, to address concerns of US practitioners who feared that ASC 606-10-32-2 would require them to evaluate VAT on a jurisdiction-by-jurisdiction basis, the FASB amended ASC 606.

In ASU_2016-12 it added ASC 606-10-32-2A: An entity may make an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue producing transaction and collected by the entity from a customer (for example, sales, use, value added, and some excise taxes). Taxes assessed on an entity’s total gross receipts or imposed during the inventory procurement process shall be excluded from the scope of the election. An entity that makes this election shall exclude from the transaction price all taxes in the scope of the election and shall comply with the applicable accounting policy guidance, including the disclosure requirements in paragraphs 235-10-50-1 through 50-6.

As a result, companies applying US GAAP need not evaluate VAT and similar taxes country by country, but can exclude all VAT and similar taxes from the measurement regardless of where they are received or paid.

For its part, the IASB concluded that companies applying IFRS internationally are accustomed to evaluating jurisdictions separately, have no trouble distinguishing principal from agent and so did not feel the need for a similar policy election.

The reason is that VAT is not an economic resource controlled by the company that collects it, but by the tax collection authority on whose behalf it is collected.

In other words, a company that collects VAT from its customers is acting an agent, collecting the tax on behalf of government.

Obviously, this only applies to VAT payors.

Companies, for example health care providers in some jurisdictions, do not collect VAT from their customers. Thus, since they are not agents of the government, they treat the VAT they pay to suppliers as a sales tax, which they include in the acquisition cost of assets / measurement of expenses.

Less clear, in the eyes of some (primarily IFRS) accountants, is whether this also applies to the receivable.

For accountants that apply US GAAP outside of the United States, this is a non-issue. While a few exceptions exist, practically all US GAAP companies disaggregate VAT from both the transaction price and the receivable. For this reason, the remainder of this discussion focuses on IFRS.

In other words, since VAT is commonly recognized as part of a receivable / payable per national GAAP, accountants accustomed applying such a GAAP would very much like to use the same procedure for IFRS purposes.

The problem is, IFRS 15.108 clearly states: A receivable is an entity’s right to consideration ...

While IFRS does not define the term "consideration", its meaning is understood in law where it is the reward a company receives in exchange for delivering goods / rendering services, or whatever else it promises in a contract.

In law (link: Black's law dictionary) consideration it is the inducement to a contract. The cause, motive, price, or impelling influence which induces a contracting party to enter into a contract. ...

Since a company cannot retain the VAT it collects, it is not its, and cannot be, its reward.

If anything, VAT is a government's reward for allowing companies to deliver goods / render services in its territory.

This implies that recognizing as a receivable is not consistent with IFRS.

Technically speaking, since IFRS is a financial reporting system that does not prescribe accounting procedures, provided that a company segregates receivables (right to consideration) and VAT (an agency item) in its report (as in the follow-up example), it does not need to use separate accounts as in this example.

Nevertheless, not using separate accounts could never be called good accounting.

The same account is used for the VAT associated with both purchases and sales in that its balance is reported as either an asset or a liability (until refunded by / remitted to the taxation authority).

It is also important to note that, since the VAT paid to vendors is refundable, it cannot be included in the measurement of assets or expenses. Instead, the amount remitted by / refunded to a VAT payor is presented on its profit and loss statement as a tax other than income / refund of a tax other than income.

1/14/X2 / 14.1.X2

 

 

Cash

12,100

 

 

Trade receivables: ABC

 

10,000

 

Accrued assets: VAT: ABC

 

2,100


1/15/X2 / 15.1.X2

 

 

Accounts payable: DEF

5,000

 

Accrued liabilities: VAT: DEF

1,050

 

 

Cash

 

6,050


1/23/X2 / 23.1.X2

 

 

Tax other than income: VAT

1,050

 

 

Cash

 

1,050


For illustration purposes, only the VAT remittance associated with the two transactions is presented.

XYZ
Balance sheet
12/31/X1 / 31.12.X1

Current assets*

 

 

Trade receivables

10,000

 

Accrued assets: VAT

2,100

 

 

 

Current liabilities*

 

 

Trade payables

5,000

 

Accrued liabilities: VAT

1,050

 

Taxes other than income: Net VAT / GST due

1,050

 

 

 

* Only the pertinent operation is presented


Alternatively

Habits die hard and bad habits die hardest.

As a result, in countries where national GAAP recognizes gross receivables, accountants would like to do this:

12/14/X1 / 14.12.X1

 

 

Inventory: Merchandise

5,000

 

Value added tax

1,050

 

 

Accounts payable: DEF

 

6,050


12/15/X1 / 15.12.X1

 

 

Trade receivables: ABC

12,100

 

 

Revenue

 

10,000

 

Value added tax

 

2,100


While hardly good accounting, provided that the receivable and VAT are clearly segregated on the balance sheet, it would not be an error.

As both IFRS and US GAAP concern themselves with reporting rather than dictating accounting procedures, provided that the correct items and amounts are reported in a way that is clear to users, the accounting procedures used are, more or less, a company's own choice.

Proper segregation is also in a company's best interest.

If users fail to notice that VAT and receivables are separate items, they could conclude that the company has trouble collecting on time.

For example, if XYZ had annual revenues of 120,000 and users calculated days of sales outstanding using the gross receivable, the ratio would appear to be 36.3 days, not the 30 days it actually is.

36.3 = 12,100 ÷ 120,000 x 360

Related party

Related party (IFRS vs US GAAP) loan recognized at "arm's length."

IFRS requires the disclosure of related parties even if there have been no transactions and the entities have been consolidated.

Edited, emphasis added:

IAS 24.3: This Standard requires disclosure of related party relationships, transactions and outstanding balances, including commitments; IAS 24.13: Relationships between a parent and its subsidiaries shall be disclosed irrespective of whether there have been transactions between them; IAS 24.14: ... it is appropriate to disclose the related party relationship when control exists, irrespective of whether there have been transactions between the related parties. IAS 24.15: The requirement to disclose related party relationships between a parent and its subsidiaries is in addition to the disclosure requirements in IAS 27 and IFRS 12 Disclosure of Interests in Other Entities.

IAS 24.9: A related party is a person or entity that is related to the entity that is preparing its financial statements (in this Standard referred to as the ‘reporting entity’).

(a) A person or a close member of that person’s family is related to a reporting entity if that person:

   (i) has control or joint control of the reporting entity;

   (ii) has significant influence over the reporting entity or

   (iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.

(b) An entity is related to a reporting entity if any of the following conditions applies:

   (i) The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).

   (ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).

   (iii) Both entities are joint ventures of the same third party.

(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.

   (v) The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.

   (vi) The entity is controlled or jointly controlled by a person identified in (a).

   (vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

   (viii) The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity.

In contrast, US GAAP only requires the disclosure of relate party transactions that have not been eliminated in consolidation.

ASC 850-10-50-1 (edited, emphasis added): Financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements....

ASC 850-10-20: Related parties include:

a. Affiliates of the entity

b. Entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity

c. Trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management d. Principal owners of the entity and members of their immediate families e. Management of the entity and members of their immediate families

f. Other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests

g. Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

For illustration purposes, this example uses a loan to a close family member of key management personnel (IFRS 24.9 | ASC 850.10.20).

The same general approach would, however, apply to a related party receivable, payable or other balance.

Note: US GAAP (ASC 850-10-51-1) does not require related party balances eliminated in consolidation or combination to be disclosed (also see ASC 810-10-45 and 50).

Instead of accounting for the transaction "at arm's length", XYZ could just have disclosed the terms of the loan in the footnotes.

Both IFRS and US GAAP require material related party transactions to be disclosed.

A company may, however, disclose that it had accounted for the transactions as if they had been entered into "at arm's length" (between unrelated market participants) provided it can prove this to be the case.

IAS 24.23: Disclosures that related party transactions were made on terms equivalent to those that prevail in arm’s length transactions are made only if such terms can be substantiated.

ASC 850-10-50-5: Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.

IAS 24.18: If an entity has had related party transactions during the periods covered by the financial statements, it shall disclose the nature of the related party relationship as well as information about those transactions and outstanding balances, including commitments, necessary for users to understand the potential effect of the relationship on the financial statements. These disclosure requirements are in addition to those in paragraph 17. At a minimum, disclosures shall include:

(a) the amount of the transactions;

(b) the amount of outstanding balances, including commitments, and:

   (i) their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement; and

   (ii) details of any guarantees given or received;

(c) provisions for doubtful debts related to the amount of outstanding balances; and

(d) the expense recognised during the period in respect of bad or doubtful debts due from related parties.

ASC 850-10-50-1: Financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include:

a. The nature of the relationship(s) involved

b. A description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements

c. The dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period

d. Amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement

e. The information required by paragraph 740-10-50-17.

1/1/X1, XYZ lent the wife of its CEO 100,000 for two years at 2%. The interest and principal were payable at the end of the term. As neither the nominal (2%) nor implicit (1.91%) rates were reasonable, XYZ imputed a discount rate by determining a bank would have (without a guarantee from XYZ) demanded 12%.

Dr/Cr

1/1/X1 / 1.1.X1

 

 

Loan

100,000

 

Deferred related party compensation

17,092

 

 

Cash

 

100,000

 

Deferred interest income

 

17,092


17,092 = 100,000 - 104,000 ÷ (1 + 12%)2

12/31/X1 / 31.12.X1

 

 

Deferred interest income

7,949

 

Interest receivable

2,000

 

Related party compensation

8,546

 

 

Interest income

 

9,949

 

Deferred related party compensation

 

8,546



P

Discount rate

Net loan amount

Interest income

Interest receivable

Discount amortization

A

B

C=C(C+1)+F

D = C x B

E=100,000 x 2%

F=D-E

1

12%

82,908

9,949

2,000

7,949

2

12%

92,857

11,143

2,000

9,143

 

 

 

21,092

4,000

17,092

 


12/31/X2 / 31.12.X2

 

 

Deferred interest income

9,143

 

Interest receivable

2,000

 

Related party compensation

8,546

 

 

Interest income

 

11,143

 

Deferred related party compensation

 

8,546

Cash

104,000

 

 

Loan

 

100,000

 

Interest receivable

 

4,000


Loss

104,000

 

 

Loan

 

100,000

 

Interest receivable

 

4,000


Factoring and pledging

XYZ sold receivables with a book value of 100,000 for 90.000.

Dr/Cr

Cash (receivable from factor)

90,000

 

Loss on sale of receivables

10,000

 

 

Accounts receivable

 

100,000


In some jurisdictions, national GAAP requires companies to recognize the consideration received for factored receivables as revenue with the factored receivables being an expense. This procedure is not permissible under either IFRS or US GAAP.

Same facts except XYZ had recognized an allowance for doubtful accounts (associated with the factored receivables) of 2,000.

Cash (receivable from factor)

90,000

 

Loss on sale of receivables

10,000

 

Allowance for uncollectible accounts

2,000

 

 

Accounts receivable

 

100,000

 

Losses from uncollectible receivables

 

2,000


The factor hand an unlimited sellback option.

Dr/Cr

Cash (receivable from factor)

90,000

 

 

Loan (secured by receivables)

 

90,000


The factor could only sell back uncollectible receivables.

Cr/Cr

Cash (receivable from factor)

90,000

 

Loss on sale of receivables

10,000

 

Allowance for uncollectible accounts

2,000

 

 

Accounts receivable

 

100,000

 

Liabilities: Recourse provision

 

2,000


Instead of a discount, XYZ paid a 5% fee and 20% annual interest.

Dr/Cr

Cash (receivable from factor)

91,711

 

Interest expense

3,289

 

Factor fee

5,000

 

Allowance for uncollectible accounts

2,000

 

 

Accounts receivable

 

100,000

 

Losses from uncollectible receivables

 

2,000


XYZ assigned (pledged) the receivables instead of factoring them.

Dr/Cr

Cash (receivable from factor)

90,000

 

 

Loan (secured by receivables)

 

90,000

Uncollectible accounts

Aging-schedule method

12/31/X1, XYZ’s trade receivable balance was 1,086,312.

Using an aging schedule, it estimated uncollectible receivables at 32,875.


Trade receivables aging schedule: X1

Age in days

0 > 30

30 > 60

60 > 90

90 > 180

Over 180

Σ

X1 Balances

1,000,000

60,000

14,400

6,336

5,576

1,086,312

Factor

2.00%

5.00%

20.00%

40.00%

80.00%

 

Allowance

20,000

3,000

2,880

2,534

4,461

32,875

 

 

 

 

 

 

 


XYZ based its estimates on its own historical experience.

In evaluating this experience, its accounts receivable manager considered that, over the last three years, 2% of all invoiced amounts had become uncollectible. Of the amounts not collected in 30 days, 5% had become uncollectible. Of the amounts not collected in 60 days, 20% had become uncollectible and so on.

How many periods should be examined when evaluating historical experience is not specified. Three to five years generally lead to acceptably accurate results. However, once a pattern of collectability has been established, the schedule need only be adjusted if it fails to yield acceptably accurate results.

Dr/Cr

12/31/X1 / 31.12.X1

 

 

Losses on uncollectible receivables

32,875

 

 

Allowance for doubtful accounts

 

32,875


Both IFRS 15 and ASC 606 stipulate that this is an impairment loss.

IFRS 15.113 | ASC 606-10-50-4: An entity shall disclose all of the following amounts ... b. Any impairment losses recognized (in accordance with IFRS 9 | Topic 310 on receivables) on any receivables or contract assets arising from an entity’s contracts with customers, which the entity shall disclose separately from impairment losses from other contracts.

Consequently, the practice of reporting it as a selling or distribution expense is no longer consistent with the guidance.

Both US GAAP and IFRS require companies to estimate credit losses (a.k.a. uncollectible accounts, doubtful accounts, bad debts, etc.) and recognize an allowance whenever there is any indication that a credit loss has occurred.

In other words, if historical experience shows that some accounts become uncollectible every period, an allowance is estimated and recognized in every period.

More importantly, this shall be done on a collective (pool) basis even if individual impaired accounts cannot be identified.

The only real difference between the two, US GAAP gives more detailed instructions than IFRS.

ASC 326-20-30-1: The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net amount expected to be collected on the financial asset. At the reporting date, an entity shall record an allowance for credit losses on financial assets within the scope of this Subtopic. An entity shall report in net income (as a credit loss expense) the amount necessary to adjust the allowance for credit losses for management's current estimate of expected credit losses on financial asset(s).

The previous guidance on Impairment of Loans and Receivables (ASC 310-10-35-1 to 43) was superseded by Accounting Standards Update No. 2016-13 (ASC 326).

ASC 326-20-30-2: An entity shall measure expected credit losses of financial assets on a collective (pool) basis when similar risk characteristic(s) exist (as described in paragraph 326-20-55-5). If an entity determines that a financial asset does not share risk characteristics with its other financial assets, the entity shall evaluate the financial asset for expected credit losses on an individual basis. If a financial asset is evaluated on an individual basis, an entity also should not include it in a collective evaluation. That is, financial assets should not be included in both collective assessments and individual assessments.

ASC 326-20-30-3: The allowance for credit losses may be determined using various methods. For example, an entity may use discounted cash flow methods, loss-rate methods, roll-rate methods, probability-of-default methods, or methods that utilize an aging schedule. An entity is not required to utilize a discounted cash flow method to estimate expected credit losses. Similarly, an entity is not required to reconcile the estimation technique it uses with a discounted cash flow method.

ASC 326-20-35-1: At each reporting date, an entity shall record an allowance for credit losses on financial assets (including purchased financial assets with credit deterioration) within the scope of this Subtopic. An entity shall compare its current estimate of expected credit losses with the estimate of expected credit losses previously recorded. An entity shall report in net income (as a credit loss expense or a reversal of credit loss expense) the amount necessary to adjust the allowance for credit losses for management's current estimate of expected credit losses on financial asset(s). The method applied to initially measure expected credit losses for the assets included in paragraph 326-20-30-14 generally would be applied consistently over time and shall faithfully estimate expected credit losses for financial asset(s).

Writeoffs and Recoveries of Financial Assets

ASC 326-20-35-8: Writeoffs of financial assets, which may be full or partial writeoffs, shall be deducted from the allowance. The writeoffs shall be recorded in the period in which the financial asset(s) are deemed uncollectible. Recoveries of financial assets and trade receivables previously written off shall be recorded when received.

IFRS 15: Simplified approach for trade receivables, Contract assets and lease receivables

IFRS 15.5.5.15: Despite paragraphs 5.5.3 and 5.5.5, an entity shall always measure the loss allowance at an amount equal to lifetime expected credit losses for:

IFRS 9.5.3: ... at each reporting date, an entity shall measure the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses if the credit risk on that financial instrument has increased significantly since initial recognition.

IFRS 9.5.5.5 ... at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, an entity shall measure the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses.

(a) trade receivables or Contract assets that result from transactions that are within the scope of IFRS 15, and that:

     (i) do not contain a significant financing component in accordance with IFRS 15 (or when the entity applies the practical expedient in accordance with paragraph 63 of IFRS 15); or

     (ii) contain a significant financing component in accordance with IFRS 15, if the entity chooses as its accounting policy to measure the loss allowance at an amount equal to lifetime expected credit losses. That accounting policy shall be applied to all such trade receivables or Contract assets but may be applied separately to trade receivables and Contract assets.

(b) lease receivables that result from transactions that are within the scope of IFRS 16, if the entity chooses as its accounting policy to measure the loss allowance at an amount equal to lifetime expected credit losses. That accounting policy shall be applied to all lease receivables but may be applied separately to finance and operating lease receivables.

This also implies that applying either IFRS or US GAAP should lead to comparable results, even when those results are not comparable to a national GAAP.

Often, national GAAP is subordinated to the taxation policies of the countries in which it is applied.

For example, some such GAAPs even disregard the essence of accrual accounting by disallowing a collective allowance for uncollectible accounts.

Con.6.145: ... [the], recognition of revenues, expenses, gains, and losses and the related increments or decrements in assets and liabilities—including matching of costs and revenues, allocation, and amortization—is the essence of using accrual accounting to measure performance of entities. The goal of accrual accounting is to account in the periods in which they occur for the effects on an entity of transactions and other events and circumstances, to the extent that those financial effects are recognizable and measurable. ...

CF 4.50: Expenses are recognised in the income statement on the basis of a direct association between the costs incurred and the earning of specific items of income. This process, commonly referred to as the matching of costs with revenues, involves the simultaneous or combined recognition of revenues and expenses that result directly and jointly from the same transactions or other events; for example, the various components of expense making up the cost of goods sold are recognised at the same time as the income derived from the sale of the goods.

An example comparing IFRS | US GAAP with national GAAP is provided below.

1/16/X2, XYZ determined that it had no reasonable expectations of recovering receivable #123 for 300 from ABC.

In other words, the receivable had become uncollectible.

1/16/X2 / 16.1.X2

 

 

Allowance for doubtful accounts

300

 

 

Trade receivable: ABC: 123

 

300


ASC 326-20-35-8: Writeoffs of financial assets, which may be full or partial writeoffs, shall be deducted from the allowance. The writeoffs shall be recorded in the period in which the financial asset(s) are deemed uncollectible. Recoveries of financial assets and trade receivables previously written off shall be recorded when received.

IFRS 9.5.4.4: An entity shall directly reduce the gross carrying amount of a financial asset when the entity has no reasonable expectations of recovering a financial asset in its entirety or a portion thereof. ...

Note, even though paragraph 5.4.4 states "directly reduce", this should not be intenerated to mean that an allowance is not necessary, since paragraph 5.5.15 specifies that an allowance is necessary.

IFRS 9.5.5.15 ... an entity shall always measure the loss allowance at an amount equal to lifetime expected credit losses for: (a) trade receivables or contract assets that result from transactions that are within the scope of IFRS 15 ...

1/24/X2, XYZ determined that receivable #456 for 750 from DEF was impaired.

1/24/X2 / 24.1.X2

 

 

Allowance for doubtful accounts

750

 

 

Trade receivable: DEF: 456

 

750


etc.

Even though it had been written off on 1/16/X2, receivable #123 was collected on 20/6/X2.

Dr/Cr

XYZ reversed the write-off.

6/20/X2 / 20.6.X2

 

 

Trade receivable: ABC: 123

300

 

 

Allowance for doubtful accounts

 

300

Cash

300

 

 

Trade receivable: ABC: 123

 

300

  Alternatively    
  Alternatively    

Although a reversal is clearly the best procedure, crediting the recovery to the allowance account is not inconsistent with the guidance.

ASC 326-20-35-8: Writeoffs of financial assets, which may be full or partial writeoffs, shall be deducted from the allowance. The writeoffs shall be recorded in the period in which the financial asset(s) are deemed uncollectible. Recoveries of financial assets and trade receivables previously written off shall be recorded when received.

ASC 326-20-35-9: Practices differ between entities as some industries typically credit recoveries directly to earnings while financial institutions typically credit the allowance for credit losses for recoveries. The combination of this practice and the practice of frequently reviewing the appropriateness of the allowance for credit losses results in the same credit to earnings in an indirect manner.

As IFRS guidance is less detailed than US GAAP, it does not specifically address the procedure that should be used to recognize recoveries.

However, since the above is not disallowed, it is allowed.

Nevertheless, it is not recommended by this web site.

Cash

300

 

 

Allowance for doubtful accounts

 

300


Similarly, crediting recoveries directly to earnings (presumably as gain) is downright ugly accounting and highly unrecommended by this web site.

Cash

300

 

 

Gain (recovered uncollectible accounts)

 

300


Voiding entries, common procedure under some national GAAPs, while not explicitly disallowed, are :-(

Allowance for doubtful accounts

(300)

 

 

Trade receivable: ABC: 123

 

(300)

Cash

300

 

 

Trade receivable: ABC: 123

 

300


During X2, receivables with a total carrying value of 30,417 were written off leaving a 2,458 balance on the allowance account.

Dr/Cr

As this balance (at 7.48%) was deemed to be insignificant (less than 10%), XYZ simply re-used the X1 uncollectability estimates.


Trade Receivables Aging Schedule: X2

Age in days

0 > 30

30 > 60

60 > 90

90 > 180

Over 180

Σ

X2 Balances

1,100,000

66,000

15,840

6,970

6,133

1,194,943

Factor

2.00%

5.00%

20.00%

40.00%

80.00%

 

Allowance

22,000

3,300

3,168

2,788

4,907

36,162

 

 

 

 

 

 

 


12/31/X2 / 31.12.X2

 

 

Losses from uncollectible receivables

33,704

 

 

Allowance for doubtful accounts

 

33,704


33,704 = 36,162 - 2,458

Same facts except only 23,899 was written off during X2.

As the difference (8,976) was (at 27.30%) significant, XYZ not only carried forward the balance, but adjusted the collectability assessment to reflect its new experience.


Trade Receivables Aging Schedule: X2

Age in days

0 > 30

30 > 60

60 > 90

90 > 180

Over 180

Σ

X2 Balances

1,100,000

66,000

15,840

6,970

6,133

1,194,943

Factor

1.50%

3.00%

14.00%

25.00%

60.00%

 

Allowance

16,500

1,980

2,218

1,742

3,680

26,120

 

 

 

 

 

 

 


While an annual adjustment is generally sufficient, the schedule should also be adjusted in any interim period where it becomes evident that the collectability of receivables has significantly changed.

12/31/X2 / 31.12.X2

 

 

Losses from uncollectible receivables

17,144

 

 

Allowance for doubtful accounts

 

17,144


17,144 = 26,120 - (32,875 - 23,899)

Same facts except only 5,000 was written off during X2.

The difference was not only material but also due to a misuse of facts, so XYZ corrected the prior period.

IAS 8. Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that:

(a) was available when financial statements for those periods were authorised for issue; and

(b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements. Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud. ASC 250-10

ASC 250-10-20: An error in recognition, measurement, presentation, or disclosure in financial statements resulting from mathematical mistakes, mistakes in the application of generally accepted accounting principles (GAAP), or oversight or misuse of facts that existed at the time the financial statements were prepared. A change from an accounting principle that is not generally accepted to one that is generally accepted is a correction of an error.

12/31/X2 / 31.12.X2 correction of error: 12/31/X1 / 31.12.X1

 

 

Allowance for doubtful accounts

32,875

 

 

Losses from uncollectible receivables

 

32,875

Losses from uncollectible receivables

5,000

 

 

Allowance for doubtful accounts

 

5,000


IAS 8.42 ... an entity shall correct material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery by:

(a) restating the comparative amounts for the prior period(s) presented in which the error occurred; or ...

ASC 250-10-45-23: Any error in the financial statements of a prior period discovered after the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) shall be reported as an error correction, by restating the prior-period financial statements. ...

Percentage of sales method

During X1, XYZ sold goods worth 13,035,744 on credit.

Applying a factor of 0.252%, it estimated uncollectible receivables at 32,875.

The aging schedule method is superior because leads to better results.

In practice, a simple percentage of receivables method is also occasionally used.

However, this method is so unreliable that no example of how it should be applied is presented.

Its additional advantage is that it is specifically mentioned in the guidance.

ASC 326-20-30-3: The allowance for credit losses may be determined using various methods. For example, ... aging schedule. ...

Since ASC 326 deals with more than just trade receivables, paragraph 30-3 gives more guidance than needed for just trade receivables.

ASC 326-20-30-3: The allowance for credit losses may be determined using various methods. For example, an entity may use discounted cash flow methods, loss-rate methods, roll-rate methods, probability-of-default methods, or methods that utilize an aging schedule. An entity is not required to utilize a discounted cash flow method to estimate expected credit losses. Similarly, an entity is not required to reconcile the estimation technique it uses with a discounted cash flow method.

It also mentions loss-rate methods (commonly used by insurance providers), roll-rate methods (credit card issuers) and probability-of-default methods (banks).

As IFRS provides less procedural guidance than US GAAP, it does not give any examples of the methods that should be used to determine expected credit losses.

Simplified approach for trade receivables, contract assets and lease receivables

IFRS 15.5.5.15: Despite paragraphs 5.5.3 and 5.5.5, an entity shall always measure the loss allowance at an amount equal to lifetime expected credit losses for:

IFRS 9.5.3: ... at each reporting date, an entity shall measure the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses if the credit risk on that financial instrument has increased significantly since initial recognition.

IFRS 9.5.5.5 ... at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, an entity shall measure the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses.

(a) trade receivables or contract assets that result from transactions that are within the scope of IFRS 15, and that:

    (i) do not contain a significant financing component in accordance with IFRS 15 (or when the entity applies the practical expedient in accordance with paragraph 63 of IFRS 15); or

    (ii) contain a significant financing component in accordance with IFRS 15, if the entity chooses as its accounting policy to measure the loss allowance at an amount equal to lifetime expected credit losses. That accounting policy shall be applied to all such trade receivables or contract assets but may be applied separately to trade receivables and contract assets.

(b) lease receivables that result from transactions that are within the scope of IFRS 16, if the entity chooses as its accounting policy to measure the loss allowance at an amount equal to lifetime expected credit losses. That accounting policy shall be applied to all lease receivables but may be applied separately to finance and operating lease receivables.

The percentage of sales method is thus not recommended by this web site, even though it is common in practice.

32,875 = 13,035,744 x 0.25219%

Dr/Cr

12/31/X1 / 31.12.X1

 

 

Losses from uncollectible receivables

32,875

 

 

Allowance for doubtful accounts

 

32,875


During X2, it actually wrote off receivables of 35,875. To reflect this, it adjusted the factor to 0.275%.

The procedure for writing off individual receivables is the same as in the above example.

0.275% = 35,875 ÷ 13,045,635.

The factor should be re-examined each period, adjusted to reflect the actual uncollectible accounts from the previous period. Unless the situation begins to change significantly, an annual adjustment should be sufficient to prevent materially inaccurate results.

Its X2 sales were 14,340,000.

12/31/X2 / 31.12.X2

 

 

Losses from uncollectible receivables

39,435

 

 

Allowance for doubtful accounts

 

39,435


39,435 = 14,340,000 x 0.275%

National GAAP (deferred tax)

12/31/X1, XYZ’s net trade receivable balance was 1,086,312.

For IFRS | US GAAP purposes, it estimated bad debts of 32,875.

The income and value added tax rates in XYZ’s jurisdiction are 20% and 21% respectively.


Trade Receivables Aging Schedule

Age in days

0 > 30

30 > 60

60 > 90

90 > 180

Over 180

Σ

Balance

1,000,000

60,000

14,400

6,336

5,576

1,086,312

Factor

2.00%

5.00%

20.00%

40.00%

80.00%

 

Allowance

20,000

3,000

2,880

2,534

4,461

32,875

 

 

 

 

 

 

 


Dr/Cr

IFRS / US GAAP book: 12/31/X1 / 31.12.X1

 

 

Losses from uncollectible receivables

32,875

 

 

Allowance for doubtful accounts

 

32,875

Deferred income tax: X1

7,956

 

 

Income tax expense

 

7,956


National GAAP book: 12/31/X1 / 31.12.X1

 

 

--

--

 

 

--

 

--


In XYZ's jurisdiction, creditors may recognize a tax-deductible expense for uncollectible accounts over a three-year period provided they have initiated formal, legal collection proceedings against the debtor.

If they have not initiated these proceedings, they may only recognize a tax-deductible expense of 20%, unless bankruptcy proceedings against the debtor have been initiated, in which case they may recognize 100%.

VAT remitted to taxation authorities but not collected from the debtor is not generally refundable. In limited circumstances, it is refundable if bankruptcy proceedings against the debtor have been initiated.

In all cases, the measurement basis is the gross invoiced amount including VAT.

To cope with these requirements, XYZ maintains separate accounts for national GAAP purposes.

The national GAAP in XYZ's jurisdiction prescribes a chart of accounts, financial statement formats and accounting procedures that are, in many cases, fundamentally at odds with IFRS | US GAAP guidance.

To cope with the conflicting requirements and avoid potential errors, XYZ employs separate recognition, measurement and disclosure policies for each standard, the optimal approach to dealing with this situation.

Another approach is to maintain one set of accounts and make reconciliations.

However, since this policy opens the door to material errors, it is not recommended by this web site.

As does the hybrid approach of using separate accounts only for those items that are subject to differing IFRS | US GAAP and national GAAP recognition and measurement requirements.

Another option (permissible in some jurisdictions) is to maintain an IFRS book as a primary set of accounts and make adjustments to national GAAP.

As this procedure starts with IFRS, there is little potential for errors so it is not objectionable.

This procedure does, however, open the door to errors in applying the national GAAP.

However, the focus of this web site is not national GAAP, so this issue is not relevant to this discussion.

For companies applying US GAAP outside of the United States, local legislation must explicitly permit reconciling US GAAP to national GAAP for this policy to be appropriate.

2/15/X2, XYZ deemed receivable # 123 for 300 (363 including VAT) to be uncollectible.

IFRS / US GAAP book: 2/15/X2 / 15.2.X2

 

 

Allowance for doubtful accounts

300

 

 

Accounts receivable: # 123

 

300


Under IFRS and US GAAP, revenue is measured net of VAT/GST.

IFRS 15.47 | ASC 606-10-32-2: ... The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). ...

A separate example, including a discussion of why VAT/GST is a form of sales tax, is provided below.

The same logic should be applied to the associated receivable.

National GAAP book: 2/15/X2 / 15.2.X2

 

 

--

--

 

 

--

 

--


During X2, XYZ initiated formal collection proceedings, filing the required legal motions.

National GAAP book: 12/31/X2 to 12/31/X4 / 31.12.X2 to 31.12.X4

 

 

558 - Creation and clearing of legal allowances in operating activities

121

 

 

391 - Allowance to receivables: Invoice # 123

 

121


As noted above, in XYZ's tax jurisdiction, companies are allowed to claim a tax deduction over a three-year period provided they initiate formal collection proceedings.

The prescribed national GAAP accounting procedure is to debit account 558 (the "legal" in its title signifies that it is recognizable per tax law) and credit account 391 (which must be associated with the particular receivable by invoice number).

Account 558 is taken to the national GAAP P&L, where it is presented as an expense.

This is done in each of the three years over which the expense may be claimed for tax purposes.

121 = 300 x 1.21 ÷ 3

In XYZ’s tax jurisdiction, while companies cannot claim a refund of the VAT remitted on uncollectible accounts, the gross invoiced amount (including VAT) serves as the measurement basis for this expense.

IFRS / US GAAP book: 12/31/X2 to 12/31/X4 / 31.12.X2 to 31.12.X4

 

 

Income tax payable

24

 

 

Deferred income tax: X1

 

24


24 = 363 x 20% ÷ 3

National GAAP book: 12/31/X4 / 31.12.X4

 

 

558 - Creation and clearing of legal allowances in operating activities

363

 

391 - Allowance to receivables: Invoice # 123

363

 
  558 - Creation and clearing of legal allowances in operating activities  

363

 

311 - Receivables from business relationships: Invoice # 123

 

363


In the third year, the prescribed national GAAP accounting procedure is to debit account 558 (presented as an expense in the P&L) and also credit account 558 (presented as revenue in the P&L).

The receivable (account 311) is then written off against the allowance (account 391).

Why not simply debit account 391, credit account 311 and omit account 558 altogether?

Besides feeling no need to match the original revenue and expense, XYZ's national GAAP has no qualms with double counting that revenue and expense, even throwing in some tax, just for good measure.

One of the quirks that makes reconciling national GAAP to IFRS | US GAAP interesting, though not for the timid.

Obviously, as national GAAPs vary by jurisdiction, a detailed discussion of all their quirks is far beyond the scope of this web site.