Accounts receivable represent enforceable rights originated by sales, services rendered, granting of loans or any other similar concept.
Valuation standards
Considering paragraph 60 of NIF A-6, Recognition and valuation, accounts receivable must be recognized at their realizable value, which is the amount received, in cash, cash equivalents or in kind, for the sale or exchange of an active; therefore, the accounts receivable must be quantified at the originally agreed value of the enforceable right.
The example illustrated above is the initial recognition of an account receivable for the sale of merchandise, without considering value added tax or similar.
Taking into account the basic postulate of accounting accrual, the agreed value must be modified to reflect what is reasonably expected to be obtained in cash, kind, credit or services, from each of the items that comprise it; This requires that agreed discounts and bonuses be given effect, as well as estimates for irrecoverable or difficult collection.
The increases or reductions that have to be made to the estimates, based on the valuation studies, must be charged or credited to the results of the year in which they are made.
The example illustrated above is the initial recognition for the possible loss in the recovery of accounts receivable, the estimate for uncollectible accounts of a creditor nature, will be presented by subtracting accounts receivable in the statement of financial position.
The increases or reductions that have to be made to the estimates, based on the valuation studies, must be charged or credited to the results of the year in which they are made.
The estimate for uncollectible accounts in the previous illustration is just that, a technical estimate with the elements that we have at our disposal at the time of registration, so that later it will have to be adjusted with the final figures, which can happen in the following exercise or exercises, as follows:
The example in the table above corresponds to an initial credit sale for $ 5M, which was estimated to be unrecoverable $ 1.5M, I suppose that there is a lawsuit for its collection and finally only $ 1.5M was recovered, so the estimate fell short for $ 500,000. In accordance with the Financial Reporting Standard NIF B-1 Accounting changes and error corrections, the adjustments to the estimates are made prospectively, so the difference will be recognized in the results of the subsequent year.
When accounts receivable are long-term *, the realizable value must be quantified considering their present value in terms of the provisions of paragraphs 67 to 85 of FRS A-6, which define said present value as “… the present value of future net cash flows, discounted at an appropriate discount rate, that is expected to generate an item during the normal course of operation of an entity. The present value represents the cost of money over time, which is based on the projection of cash flows derived from the realization of an asset or the settlement of a liability. "
Interest derived from accounts receivable must be recognized as income in the period in which they accrue.
Accrued interest derived from difficult-to-recover accounts should not be recognized because it is unlikely that the benefits derived from the transaction will flow to the entity.
In the previous table, in entry 1 I assume a sale for $ 1M at an interest rate of 2% per month, the accrual interest account must be presented within the accounts receivable item, in such a way that it is presented at all times its net present value, in this case a net balance of clients for $ 1,000,000 (Clients $ 1,000,000 less $ 360,000 of accrued interest.
In seat 2, the interest accrued for the first month for $ 20,000 (2% of $ 1,000,000) is recorded.
Presentation rules
Considering their availability, accounts receivable can be classified as requiring immediate or short-term, and long-term.
Based on their origin, two groups of accounts receivable can be formed:
In charge of clients
Payable by other debtors
Within the first group, the documents and accounts in charge of clients of the entity, derived from the sale of merchandise or provision of services, that represent the normal activity of the entity must be presented.
In the second group, they originate from transactions other than those for which the entity was incorporated, such as: Loans to shareholders and officials and employees, claims, sales of fixed assets, taxes paid in excess, etc.; They should be grouped by concept and according to their importance, if the amounts are not of importance, they can be shown as other accounts receivable.
Accounts payable to holding companies, subsidiaries, affiliates and associates must be presented separately within the accounts receivable group, since they frequently have special characteristics in terms of their enforceability. If it is considered that these accounts are not due immediately and that their balances are more like investments by the entity, they should be classified in a special chapter on non-current assets.
The entry described above is not recorded in accounting, it is only run in the worksheet for the preparation of the financial statements, since the presentation rules refer to the adjustments in the figures in the financial statements only, not in the records. accounting, that is, a sale of merchandise to an affiliated company is charged to customers, that is the accounting record, however, by presentation rule, that balance will be presented separately in the statement of financial position.
The comments in the previous paragraph apply to all presentation rules.
Credit balances in accounts receivable should be reclassified as accounts payable, if their relative importance warrants it.
The unearned interest receivable that has been included as part of the accounts receivable must be presented by deducting from the balance of the account in which they were charged.
When the balance in accounts receivable of an entity includes important items in charge of a single individual or legal entity, its amount must be shown separately within the generic accounts receivable item or, failing that, it should be disclosed through a note to Financial statements.
When there are accounts receivable and payable to the same individual or legal entity, they must, when applicable, be offset for presentation purposes in the balance sheet, showing the resulting balance as an asset or liability as appropriate.
In the table above I suppose a client of the entity which is also a supplier, for a balance of $ 1,200,000 and $ 900,000 in amounts receivable and payable, respectively; Therefore, a net balance in clients of $ 300,000 will be presented.
It is important to note that according to the Financial Reporting Standard NIF B-12 Compensation of financial assets and financial liabilities, there must be between the parties the intention to compensate, that is, its compensated amount must be presented as long as the future cash flow of its collection or settlement is net.
Estimates for uncollectible accounts, discounts, bonuses, etc., should be shown on the balance sheet as deductions to accounts receivable. In the event that the net balance is presented, the amount of the estimate made must be mentioned in a note to the financial statements.
The balances in charge of owners, shareholders or partners of an entity, representing subscribed capital not exhibited, should not be included in the accounts receivable item.
- It must be clearly established in the balance sheet or in the notes to the financial statements, the situation of the accounts receivable with respect to liens of any type that fall on them, restrictions that have because their recoverability is conditioned to the completion of works, provision services, etcetera.
- When there are accounts and documents receivable in foreign currency, this fact must be disclosed in the body of the balance sheet or in a note to the financial statements.
- The amount of the contingent liability for the entity must be disclosed, for documents and accounts receivable sold or discounted with responsibility for the entity.
