[ACYFAR1] Notes Receivable

• A note receivable is a claim supported by a formal promise to pay a certain sum of money at a specific future date usually in a form of a promissory note.
• Interest-bearing notes have a stated interest rate.
• Noninterest-bearing notes do not have a stated interest rate because they include the interest element as part of the face amount.
• A short-term receivable is initially measured at face amount. However, if the transaction contains a significant financing component, then it will be measured at present value.
• Trade receivables that do not have a significant financing component shall be measured at their transaction price.
• As a practical expedient, a trade receivable may not be discounted if it is due within 1 year.
• A long-term receivable with a reasonable interest rate is measured at face amount.
• A long-term receivable that bears no interest is measured at present value.
• A long-term receivable with an unreasonable interest rate is measured at present value.
• The difference between the present value and the face amount of the receivable is initially recorded as unearned interest and subsequently amortized as interest revenue under effective interest method.
• The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument.
• Receivables initially recognized at present value are subsequently measured at amortized cost..
• If the initial measurement is a cash price equivalent or the non-cash asset given up, the subsequent measurement is amortized cost.
• The present value of 1 and the future value of 1 are only used when the cash flow is on a lump sum basis.
• For non-interest bearing notes, the inital amount of unearned interest income represents the total interest income to recognized over the life of the note.
• Receivable financing refers to the act of including cash inflows from receivables other than from their normal or scheduled payments.
• A pledge is treated as a secured borrowing because the borrower retains control over the pledged receivables.
• No entry is made for pledged receivables; only a note disclosure is necessary.
• Assignment is a formal form of pledge wherein receivables used as collateral security for borrowing are specifically identified and stated in the loan contract.
• The assigned receivables are presented in the statement of financial position as regular receivables. However, the equity in the assigned receivables is disclosed in the notes.
• There are two forms of assignment: (1) notification basis and (2) non-notification basis.
• Notification basis is when the assignor notifies the debtors whose receivables have been assigned about the assignment. Accordingly, the debtors will remit payments on the receivables directly to the lender.
• Non-notification basis is when the borrower does not notify the debtors. Accordingly, the debtors will continue to remit payments to the borrowers. This is the most common way.
• The assigned receivable and the note payable are presented separately in the statement of financial position and are not offset.
• Factoring is when receivables are sold to financial institutions (factor) on a (1) with recourse or (2) without recourse basis.
• On a without recourse basis, the factor assumes the risk of uncollectibility and absorbs any credit loses. This is considered an outright sale of receivables and they will be derecognized accordingly.
• On a with recourse basis, the transferor guarantees payment and will be liable to the factor in the event the debtor fails to pay. This is recorded using a financial components approach because of the transferors continuing involvement to the receivables.
• Whether the factoring is with or without recourse, the transferor is responsible for any reduction in the collections of the receivables due to sales returns and discounts. This creates the Factor's Holdback, which is returned by the factor upon full collection of the receivable.
• If the factoring was done on a casual basis, the charges are recorded as loss.
• If the factoring was done in continuing involvement, then charges are recorded as their regular expense accounts.
• Credit card transactions are factoring with recourse.
• A seller records a sale to a customer using a credit card as a receivable from the customer's credit card company rather than from the customer.
• Discounting of notes receivable is when the holder endorses a note to a bank in exchange for the maturity value less discount.
• Conditional sale is a contingent liability equal to the face amount of the note is only disclosed in the notes to financial statments.
• Secured borrowing is when a liability equal to the face amount of the note is recognized.
• Dishonored notes are reclassified from notes receivable to accounts receivable because they now become an ordinary claim.
• A loan receivable is similar to a note receivable but is more appropriately used by banks and financing institutions whose main operations are lending money.
• Transaction costs are incremental costs that are directly attributable to the acquisition, issue, or disposal of a financial asset or liability.
• Transaction costs do not include debt premiums or discounts, financing costs, or holding costs.
• Direct organization costs are initially added to the carrying amount of the loan. Subsequent amortization decreases the carrying amount of the loan and the interest income.