IFRS: Account Receivables Allowances

In this posting, we would like to share about the accounting treatment for account receivables provision/ allowance, under IFRS. I am interested to share the treatment, because some of us does not know that there are some changes and some misinterpret how to assess the impairment of significance receivables. The misinterpretation for example: some of my friends thought that, under IFRS for assessing the collectability of AR, company should send a confirmation letter, to confirm the ability of their creditors to repay the receivables.
The basic accounting and reporting issues related to recognition and measurement of receivables, such as the use of allowance accounts, how to record discounts, use of the allowance method to account for bad debts, and factoring, are similar for both IFRS and GAAP.

RELEVANT FACTS: IFRS Account Receivables

• IFRS requires that loans and receivables be accounted for at amortized cost, adjusted for allowances for doubtful accounts. IFRS sometimes refers to these allowances as provisions. The entry to record the allowance would be:

-	Bad Debt Expense	xxxxxxx
-	Provision for Doubtful Accounts	xxxxxxx

• Although IFRS implies that receivables with different characteristics should be reported separately, there is no standard that mandates this segregation.

Impairment Evaluation Process

IFRS provides detailed guidelines to assess whether receivables should be considered uncollectible (often referred to as impaired). Under IFRS, companies assess their receivables for impairment each reporting period and start the impairment assessment by considering whether objective evidence indicates that one or more loss events have occurred. Examples of possible loss events are:

• Significant financial problems of the customer.
• Payment defaults.
• Renegotiation of terms of the receivable due to financial difficulty of the customer.
• Measurable decrease in estimated future cash flows from a group of receivables since initial recognition, although the decrease cannot yet be identified with individual assets in the group.

A receivable is considered impaired when a loss event indicates a negative impact on the estimated future cash flows to be received from the customer (IAS 39, paragraphs 58–70). The IASB requires that the impairment assessment should be performed as follows.

1. Receivables that are individually significant are considered for impairment separately, if impaired, the company recognizes it. Receivables that are not individually significant may also be assessed individually, but it is not necessary to do so.
2. Any receivable individually assessed that is not considered impaired is included with a group of assets with similar credit-risk characteristics and collectively assessed for impairment.
3. Any receivables not individually assessed are collectively assessed for impairment.

To illustrate, assume that Hector Company has the following receivables classified into individually signifi cant and all other receivables.
Individually significant receivables

Yaan Company	$ 40,000
Randon Inc.	100,000
Fernando Co.	60,000
Randon Inc.	50,000	$250,000
All other receivables		500,000
TOTAL		$750,000

Hector determines that Yaan’s receivable is impaired by $15,000, and Blanchard’s receivable is totally impaired. Both Randon’s and Fernando’s receivables are not considered impaired. Hector also determines a composite rate of 2% is appropriate to measure impairment on all other receivables. The total impairment is computed as follows.
Accounts Receivable Impairments
Individually assessed receivables

Yaan Company		$15,000
Blanchard Ltd.		50,000
Collectively assessed receivables	$500,000
Add: Randon Co.	100,000
Add: Fernando Co.	60,000
Total collectively assessed AR	$660,000
Collectively assessed impairments	($660,00 x 2%)	13,200
Total impairment		$78,200

Hector therefore has an impairment related to its receivables of $78,200. The most controversial part of this computation is that Hector must include in the collective assessment the receivables from Randon and Fernando that were individually assessed and not considered impaired. The rationale for including Randon and Fernando in the collective assessment is that companies often do not have all the information at hand to make an informed decision for individual assessment.

Recovery of Impairment Loss

Subsequent to recording an impairment, events or economic conditions may change such that the extent of the impairment loss decreases (e.g., due to an impairment in the debtor’s credit rating). Under IFRS, some or all of the previously recognized impairment loss shall be reversed either directly, with a debit to Accounts Receivable, or by debiting the allowance account and crediting Bad Debt Expense.
To illustrate, Ogden Bank (the creditor) recognized an impairment loss of $12,434 by debiting Bad Debt Expense for the expected loss. At the same time, it reduced the overall value of the receivable by crediting Allowance for Doubtful Accounts. Ogden made the following entry to record the loss.

-	Bad Debt Expense	12,434
-	Allowance for Doubtful Accounts	12,434

Now, assume that in the year following the impairment recorded by Ogden, Carl King (the borrower) has worked his way out of fi nancial difficulty. Ogden now expects to receive all payments on the loan according to the original loan terms. Based on this new information, the present value of the expected payments is $100,000. Thus, Ogden makes the following entry to reverse the previously recorded impairment.

-	Allowance for Doubtful Accounts	12,434
-	Bad Debt Expense	12,434

Note that the reversal of impairment losses shall not result in carrying amount of the receivable that exceeds the amortized cost that would have been reported had the impairment not been recognized.
Sumber: Kieso, Weygandt, Warfield, Intermediate Accounting, 2012.