A86045 Accoun,ng and Financial Repor,ng (2014/2015)

Transcription

1 A86045 Accoun,ng and Financial (2014/2015) Session 13 Accounts Receivable Paul G. Smith B.A., F.C.A.

2 SESSION 13 OVERVIEW 2

3 Course Objec,ves At the end of this course students will be able to: Read and perform a high level interpreta2on of the financial statements of companies applying interna9onal accoun9ng standards Iden2fy and evaluate the impact on a companies accounts of alterna9ve accoun9ng methods Carry out a high level assessment of the the economic- financial posi9on of a company repor9ng under IAS/IFRS. 3

4 Course Overview 1. Financial repor,ng under IFRS 13. Accounts receivable 2. Financial analysis and ra,os 14. Inventories 3. Financial analysis and ra,os cont d 15. Review 4. Review 16. Taxa,on (direct and indirect) 5. Revenues 17. Non- financial liabili,es 6. Costs and expenses 18. Review 7. Intangible assets 19. Review 8. Tangible assets 20. Cash Flow Statement 9. Impairment of assets/review 21. Review 10. Financial leases 22. Group accounts 11. Review 23. Business combina,ons 12. Non- current financial assets/liabili,es 24. Review Mid- term test Final test 4

5 Session 13 Overview Session overview and objec,ves Review of pre- work and session 12 recap Defini,ons Fair value discoun,ng, foreign currencies Allowances (discounts, returns, bad debts) Factoring and sale of receivables (with/without recourse) Credit risk management and disclosures Overview of session 14, required reading and assignment for next session Summary and valida,on Mins

6 Objec,ves of Session At the end of this session session students will be able to: 1. Explain how trade accounts receivable are valued in the balance sheet 2. Ar9culate the principal deduc9ons that are made in determining trade accounts receivable 3. Understand the rules for de- recogni9on of accounts receivable 4. Understand the disclosure requirements rela9ng to credit risk 6

7 SESSION 12 RECAP AND PRE- WORK SESSION 13 7

8 Recap of Session 12 Financial Instruments Non- deriva,ve/deriva,ve Fair Value (P&L vs OCI), Amor,zed Cost Risk Management: Liquidity, Counterparty, Market (Price, interest rate, currency) Hedging (Fair Value, Cash Flow, Net Investment) Accoun,ng See also SM 12.1 Deriva,ves and Hedging Primer SM 12.2 Financial Instruments - Examples 8

9 Overview of Session 13 Accounts receivable Foreign currencies Valua,on/allowances Financial discounts Returns Bad debts Discoun,ng Factoring/sale of receivables (with/without recourse) Credit Risk Disclosures 9

10 Session 13 Pre- work Reading Melville Interna,onal Financial A Prac,cal Guide: Chapter 21 Changes in Foreign exchange rates IASB Statements IFRS 7 Financial Instruments: Disclosures IAS 21 The Effects of Changes in Foreign Exchange Rates Research Iden,fy the disclosures in your chosen company in respect of accounts receivable and management of credit risk and foreign currency risks. 10

11 DEFINITIONS 11

12 Trade accounts receivable Defini,on Trade accounts receivable are amounts invoiced to and due from customers for goods and services provided. They are covered by the defini,on of a financial instrument and should be recorded at their fair value which is normally the amount at which they are ini,ally recorded (unless extended credit terms have been granted in which case they should be discounted) less any impairment allowances. Uncondi9onal receivables and payables are recognized as assets or liabili9es when an en9ty becomes party to the contract and, as a consequence, has a legal right to receive or a legal obliga9on to pay cash. (IAS 39 AG35(a), IFRS 9 B3.1.2(a)) Loans and receivables are measured at amor9zed cost using the effec9ve interest rate method and are subject to review for impairment (IAS 39.46,56) 12

13 FAIR VALUE 13

14 Fair Value - discoun,ng Future value Present value If I have 100 today and the interest rate is 7% then in one years,me this will be worth 107 i.e.. (100 + (100x7/100)) Conversely if I will receive 100 in one years,me and the interest rate is 7% then this will be worth only today i.e. (100/ (100x7/100)). If I have 100 today and the interest rate is 7% then in two years,me this will be worth i.e ((100x7) 2 /100) If I will receive 100 in two years,me and the interest rate is 7% the this will be worth only today i.e.100/((100x7) 2 /100) In prac9ce, because of materiality, this is generally only done for extended payment terms beyond 12 months. 14

15 Sale of goods in foreign currency 2. a) On September 30, 20X0 the company sells 50,000 units of product X to a customer in the USA at $10 each i.e. $500,000. b) It records this transac,on in at the exchange rate at the,me of the transac,on i.e. 1.2 or 416, c) At year end, December 31, the balance is s,ll outstanding therefore the company restates the liability at the year end rate i.e. 1.3 or 384, d) The loss of 32, is debited to the income statement. Accounts receivable Sales , ,38 416, $ Sept ,00 1, ,67 Dec ,00 1, , ,28 Exchange Differences (I/S) ,38 15

16 ALLOWANCES 16

17 Allowances Cash discounts Returns Doubkul accounts 17

18 Cash discounts Either Record with the discount Sale for 50,000 due in 30 days but with 2% discount for payment within 15 days Record without discount Or Accounts receivable Sales Accounts receivable Sales Cash Cash If then customer pays aher 15 days If customer pays within 15 days Accounts receivable Sales Accounts receivable Sales Cash Financial revenue Cash

19 Returns Normally returns should be es,mated at the,me of sale if the company has a history of accep,ng returns. Depending on the reason for the returns, and the condi,on of the returned products, the item should returned to inventory and valued at the lower of cost and net realizable value. Assume a company makes a credit sale for 50,000 of goods with a cost of 30,000. The company then agrees to accept the return of goods which it sold for 10,000 Accounts receivable Sales Inventory COGS

20 Allowance for doubkul accounts receivable Doubkul accounts Novar,s $m $m Not overdue Past due for not more than one month Past due for more than one month but less than three months Past due for more than three months but less than six months Past due for more than six months but less than one year Past due for more than one year Provisions for doubkul trade receivables Es,mates of the required allowance is normally based on an ageing of trade accounts receivable and taking into account any credit insurance that the company might have. The company may calculate a specific and/or generic allowance. 20

21 Allowance example Q3 FY13 Q2 FY13 Q1 FY13 Q4 FY12 Q3 FY13 M vs Q4 Accounts receivable, gross 62,3 75,4 60,3 80,0-17,7 Reserves for mark-down -1,3-2,2-1,1-2,0 0,7 Accounts receivable, gross 61,0 73,2 59,2 78,0-17,0 Depreciation on credits -7,4-7,0-3,7-3,6-3,8 Reserves for returns -8,3-5,8-6,8-6,6-1,7 Accounts receivable, net 45,3 60,4 48,7 67,8-22,5 Q3 FY13 Q2 FY13 Q1 FY13 Q4 FY12 /000 % /000 % /000 % /000 % Generic provision % % % % Specific provision % % % % Subtotal % % % % BDR warranty LRD Guess Italy Depreciation on credits Coverage on not secured AR (not considering BDR warranty) 18,6% 14,7% 7,2% 6,4% 21

22 Allowance example cont d /000 Q3 FY13 Q2 FY13 Q4 FY12 Total At risk % on total at risk Total At risk % on total at risk Total At risk % on total at risk Current % % % % % % % % % % % % % % % % % % Over 1 year % % % Total % % % Q3 FY13 Q2 FY13 Q1 FY13 Q4 FY12 M % M % M % M % Insured 28,5 46% 35,4 47% 25,4 42% 38,3 48% Letters of credit 0,5 1% 0,7 1% 1,1 2% 5,5 7% Bank guarantees 8,3 13% 8,5 11% 7,1 12% 6,6 8% Total secured 37,4 60% 44,6 59% 33,6 56% 50,4 63% Unsecured 24,9 40% 30,9 41% 26,7 44% 29,6 37% Total 62,3 100% 75,5 100% 60,3 100% 80,0 100% 22

23 Accoun,ng for bad debts Step 1 Step 2 Record the es,mated provision for doubkul accounts Write- off bad- debts against the provision when certain Allowance for doubkul Allowance for doubkul Accounts receivablle accounts Accounts receivablle accounts Sales Bad debt expense

24 FACTORING AND SALE OF RECEIVABLES 24

25 Factoring and sale of receivables Should cash received for a transfer or sale of an asset be recognized as a sale or a liability? The de- recogni,on rules of IAS 39 (IFRS 9) are based on the premise that if a transfer of an asset leaves the transferor s economic exposure to the transferred asset much as if the transfer had never taken place, the financial statements should represent that the transferor s,ll holds the asset. 25

26 Derecogni,on flow chart Consolidate all subsidiaries Determine whether the de- recogni,on principles below are applied to a part or all of an asset or group of similar assets Have the rights to the cash flows from the asset expired? No Yes Derecognize the asset Has the en,ty transferred its rights to receive the cash flows from the assets? No Yes Has the en,ty assumed an obliga,on to pay the cash flows from the asset that meets the condi,ons in para 3.2.5? No Con,nue to recognize the asset Yes Has the en,ty transferred substan,ally all the risk and rewards? No Has the en,ty retained substan,ally all risks and rewards? No Has the en,ty retained control of the asset? Yes Yes No Derecognize the asset Con,nue to recognize the asset Derecognize the asset Yes Con,nue to recognize the asset to the extent of the en,ty s con,nuing involvement. 26

27 Factoring With recourse The factor acquires the trade accounts receivable but the company is liable for any credit losses and must reimburse the factor for these. Trade receivables should not be derecognized and the proceeds should be considered as a liability or loan. Without recourse The factor acquires the trade accounts receivable and assumes all the collec,on risk. Trade accounts receivable are derecognized and the proceeds are considered as cash. 27

28 Factoring: pass- through test Sales/Accounts Receivables Accounts Receivables sold to factor Customer Company Factor provides cash to Factor company Cap,ve factor Normally the customer pays the factor directly If the company retains the contractual right to receive cash from the customer and assumes a legal obliga,on to pay this to the factor* * All the following condi,ons must be met: a). The en,ty has no obliga,on to pay amounts to the factor unless it collects equivalent amounts from the customer b). The en,ty is prohibited by the terms of the transfer contract from selling or pledging the receivables c). The en,ty has an obliga,on to remit any cash flows it collects on behalf of the factor without material delay. The en,ty is not allowed to reinvest such cash flows except in cash or cash equivalents. 28

29 CREDIT RISK DISCLOSURES 29

30 Credit Risk Disclosures QualitaNve disclosures a) The exposures and how they arise b) Its objec,ves, policies and processes for managing risk and the methods used to measure the risk; and c) Any changes in (a) or (b) from the previous period QuantaNve disclosures Concentra,on of credit risk Maximum exposure to credit risk Analysis of the age of financial assets that are past due but not impaired Financial assets individually determined to be impaired 30

31 OVERVIEW, REQUIRED READING AND ASSIGNMENT FOR NEXT SESSION 31

32 Session 14 Pre- work Reading Wiley Financial Under IFRS a Topic Based Approach: Chapter 10 Inventories and Construc,on Contracts IASB Statements IAS 2 Inventories IAS 11 Construc,on contracts IFRS 15 Revenues from Contracts with Customers Research For your chosen company iden,fy its accoun,ng policy and disclosures in respect of inventory and/or construc,on contracts 32

33 Overview of Session 14 Current Assets Inventories Inventories Permissible valua,on methods Raw materials Work- in- progress Finished goods Lower of cost and market Construc,on contracts Completed contract method Percentage- of- comple,on method Fixed price or cost plus 33

34 SUMMARY AND VALIDATION 34

35 Summary of Session 13 Accounts receivable Discoun,ng Foreign currencies Valua,on/allowances Financial discounts Returns Bad debts Factoring/sale of receivables (with/without recourse) Credit Risk Disclosures 35

36 Session 11 Valida,on What are the accoun,ng entries for product returns (B/S and I/S)? How do you calculate the allowance for doubkul accounts receivable? What exchange rate is used to value accounts receivable at year end? If payment terms are greater than twelve months what should the seller do? What are the two different types of factoring arrangement and what is the difference? 36