Receivables and Revenue

As outlined in IFRS 15.31 | ASC 606-10-25-23, an entity recognizes revenue when (as) it transfers control of the promised service to the customer. As outlined in IFRS 15.35.b | ASC 606-10-25-27.b, the entity transfers control if its performance creates or enhances an asset controlled by the customer.

As the repair enhanced the customer's equipment, XYZ recognized revenue when it completed the repair.

Probability of payment (50% + IFRS | 75% + US GAAP) is one of several conditions that must be met for a contract with a customer to be recognized.

Instead of a receivable or contract asset, an unbilled revenue account can be used.

As outlined in IFRS 15.92 | ASC 340-40-25-2, incremental costs of obtaining a contract are costs an entity incurs to obtain a contract ... (for example, a sales commission).

In this example, the contract was for a repair service and the diagnostic work was performed to gain that contract. It was, as a result, akin to a sales commission.

As outlined in IFRS 15.91 | ASC 340-40-25-1, an entity may only capitalize incremental costs if it expects to recover them.

In this example, XYZ concluded it was probable the customer would pay for the repair. Since this meant the cost was recoverable, XYZ capitalized it.

Neither IFRS 15.91 to 94 nor ASC 340-40-25-1 to 4 specify how companies should recognize costs to obtain a contract, only that they recognize them as assets.

Some companies prefer to recognize them as work in process, others as accruals.

Either approach would be consistent with the guidance provided by the standards.

As outlined in IFRS 15.91 | ASC 340-40-25-1, an entity capitalizes incremental costs of obtaining a contract if it expects to recover them.

In this example, XYZ initially determined it was probable the customer would pay for the repair, so it capitalized the cost.

Consequent, when it did not recover the cost, it recognized an impairment loss as outlined in IFRS 15.101 to 104 | ASC 340-40-35-3 to 6.

Note: unlike IFRS 15.104, ASC 340-40-35-6 does not allow impairment charges to be subsequently reversed.

As outlined in IFRS 15.91 | ASC 340-40-25-1, an entity may only capitalize an incremental cost of obtaining a contract if it expects to recover it.

In this example, XYZ performed the diagnostic work even though it was not probable the customer would contract for the repair.

The reason it performed the work was in the hope that the customer would contract for the repair.

Consequently, the cost incurred performing the diagnostic was analogous to a sales commission.

Full absorption costing (a.k.a. absorption costing or full costing) captures all of the costs that go into manufacturing a product (or providing a service).

These costs are subclassified as direct and indirect (a.k.a. overhead).

Direct costs are be further subclassified as direct material and direct wages while overhead as fixed (rent, depreciation, amortization, insurance, etc.) and variable (supervisor salaries, production supplies, utilities, quality control, repairs and maintenance, etc.)

While neither IFRS nor US GAAP use the term “full absorption costing” both require its use.

XYZ allocates overhead at 20% of parts and labor.

During the period, XYZ recognizes overhead costs to the Unallocated overhead account.

At the end of the period, unallocated overhead is reported on the balance sheet as either an asset or liability depending on its balance.

If it is reported as an asset, it can be presented as a sub-classification of work in process or in accruals as a pre-paid expense. If it is a liability, it would be presented as an accrued expense.

Note: since the procedure is analogous to standard costing (see the Inventory / Standard costing), the allocation of overhead to cost of sales must be periodically reviewed and adjusted to reflect actual costs.

The IFRS master glossary defines control as: The present ability to direct the use of the economic resource and obtain the economic benefits that may flow from it.

The US GAAP master glossary includes three definitions:

DEFINITION 1: The possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an entity through ownership, by contract, or otherwise (topics 310, 850).

DEFINITION 2: The direct or indirect ability to determine the direction of management and policies through ownership, contract, or otherwise (topics 954, 958).

DEFINITION 3: The same as the meaning of controlling financial interest in paragraph 810-10-15-8.

Unfortunately, not one of them applies to goods or services.

The best definition thus comes from the text of IFRS 15.33 | ASC 606-10-25-25:

... Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. ...

While XYZ did receive a payment from the customer, the payment was not compensation for performance, but an advance on future performance.

As outlined in IFRS 15.B9 | ASC 606-10-55-11, an entity must have a right to payment for the performance completed to date even if customer (or some other party) terminated the contract.

Obviously, no contract for a shipping service would require the customer to pay for the shipping service unless shipper delivered. This implies that any advance payment would be returnable and no other enforceable right to payment could exist prior to delivery.

While it is possible the shipper could still get paid, for example if the shipment were insured, such payment would not be from a customer for the service, but from an insurance carrier as an indemnification of losses. It would also, most likely be far exceed the amount that would have been paid for the shipping service and most, if not all, would be paid out to the customer.

IFRS 15.97 | ASC 340-40-25-7 (emphasis added): Costs that relate directly to a contract (or a specific anticipated contract) include any of the following:

(a) direct labour (for example, salaries and wages of employees who provide the promised services directly to the customer);

(b) direct materials (for example, supplies used in providing the promised services to a customer);

(d) costs that are explicitly chargeable to the customer under the contract; and

(e) other costs that are incurred only because an entity entered into the contract (for example, payments to subcontractors)

While XYZ could elect to review every cross-period shipment for completeness, the accounting policy implied by BC126, it could also consider that such accounting policy might require employing a specialist(s) whose task would be to make these assessments.

In contrast, if it decided to simply recognize revenue when the customer signed an acceptance form, this process could be automated and would require no human intervention.

Comparing the cost, not opting for an accounting policy implied in the BC, with the benefit, not having to pay an additional salary(ies), it could conclude that recognizing revenue associated with a service where the final act is critically important for the service as a whole to have any value would not be a violation of the spirit of the guidance, even if the boards do have a different opinion.

It may also consider, while a shipping service could theoretically be completed by a different freight forwarder if the first freight forwarder calls it quits in the middle, this practically never happens in practice implying that the opinion expressed in the BC may only reflect conjecture on the part of the board members rather than careful examination of the dynamics of a service where, without the final act being successfully completed, value is not created, but destroyed (regardless of what the popular opinion: link - PwC may be).

IFRS 15.105 | ASC 606-10-45-1 states (edited): ...An entity shall present any unconditional rights to consideration separately as a receivable.

IFRS 15.108 | ASC 606-10-45-4 states (edited): ...A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due...

IFRS 15.107 | ASC 606-10-45-3 states (edited, emphasis added): If an entity performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, the entity shall present the contract as a contract asset...

As written, the guidance in IFRS 15.105 to 109 | ASC 606-10-45-1 to 5 gives two options.

IFRS 15.105 | ASC 606-10-45-1 states (emphasis added): When either party to a contract has performed, an entity shall present the contract in the statement of financial position as a contract asset or a contract liability, depending on the relationship between the entity’s performance and the customer’s payment. An entity shall present any unconditional rights to consideration separately as a receivable.

IFRS 15.108 | ASC 606-10-45-4 explains (edited, emphasis added): A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due.

Applied to this example, since XYZ has performed and the only condition associated with its right to consideration (the customer’s payment) is having to wait a period of time, it should present a receivable, not a contract asset.

However, IFRS 15.107 | ASC 606-10-45-3 also states (edited, emphasis added): If an entity performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, the entity shall present the contract as a contract asset, excluding any amounts presented as a receivable.

In practice, “before payment is due” is often interpreted to mean that the company has not only performed (transferred goods, rendered services) but has also billed (issued an invoice).

Using a separate, unbilled revenue account gives companies an option to cover the situation where they have performed but not yet billed.

This option is especially useful for companies domiciled in (or with subsidiaries domiciled in) jurisdictions where national GAAP and/or tax law outlines different rules.

VAT legislation can be complex and vary from jurisdiction to jurisdiction.

Consequently, this example is no substitute for a detailed study of the pertinent regulations.

If a payor buys from a non-payor, the non-payor issues a regular invoice without VAT.

Non-payors are small enterprises or individuals who have not crossed the threshold for VAT registration or registered voluntarily.

While reverse charge most often applies to cross broader transactions to limit so called missing trader (a.k.a. MTIC or carousel) fraud, some jurisdictions also require reverse charge in selected domestic transactions.

VAT is not deductible in every situation. The issue was discussed by the IFRIC in the context of IFRS 17 (link - ifric).

In some jurisdictions, VAT payors are obligated to report both sales to and purchases from other VAT payors. These reports generally include VAT ID number, invoice number and amount.

Some jurisdictions require reports on all sales, including cash sales, regardless of whether they are to payors or non-payors, though this requirement can be based on different tax legislation.

Such reports do not, however, change the amount of VAT paid or refunded.

This page outlines current EU VAT requirements and exceptions: link - europa.

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 ...

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.

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

Interestingly, while both US GAAP and IFRS use the term consideration, neither define it.

This is not because its general meaning is unclear: it is the cash (or something of value like shares) paid in a transaction for something else of value (a product, service or, in this case, a company).

It is because its precise meaning is surprisingly difficult to pin down.

For example, entering "consideration" into Black's online law dictionary (link: thelawdictionary.org) brings up a blank page while Britannica (link: britannica.com), although it does define it, quickly goes off on a tangent about, among other things, love and affection.

Fortunately, a quick google search (link: google.com) quickly brings up perhaps the best definition "Consideration is a promise, performance, or forbearance bargained by a promisor in exchange for their promise. Consideration is the main element of a contract. Without consideration by both parties, a contract cannot be enforceable." (link: law.cornell.edu).

US GAAP comes closest defining:

Cash Consideration

Cash payments and credits that the customer can apply against trade amounts owed to the vendor. In addition, as indicated in Section 718-10-25, consideration in the form of share-based payment awards is recognized in the same period or periods and in the same manner (that is, capitalize versus expense) as if the entity had paid cash for the goods or services instead of paying with or using the share-based payment awards. Accordingly, guidance with respect to cash consideration is applicable to consideration that consists of equity instruments.

Consideration in the Contract

See paragraph 842-10-15-35 for what constitutes the consideration in the contract for lessees and paragraph 842-10-15-39 for what constitutes consideration in the contract for lessors.

ASC: 842-10-15-35 The consideration in the contract for a lessee includes all of the payments described in paragraph 842-10-30-5, as well as all of the following payments that will be made during the lease term:

a. Any fixed payments (for example, monthly service charges) or in substance fixed payments, less any incentives paid or payable to the lessee, other than those included in paragraph 842-10-30-5

b. Any other variable payments that depend on an index or a rate, initially measured using the index or rate at the commencement date.

Provided an entity clearly reports receivables from contracts with customers (as defined by IFRS 15.108 | ASC 606-10-45-4) separately from other "receivables", its reporting would not be inconsistent with the letter of IFRS and US GAAP (nor with their respective XBRL taxonomies).

Nevertheless, indicating that taxes like VAT are similar to accounts receivable or accounts payable could never be called good accounting.

Provided an entity clearly reports receivables from contracts with customers (as defined by IFRS 15.108 | ASC 606-10-45-4) separately from other "receivables", its reporting would not be inconsistent with the letter of IFRS and US GAAP (nor with their respective XBRL taxonomies).

Nevertheless, indicating that taxes like VAT are similar to accounts receivable or accounts payable could never be called good accounting.

36.3 = 12,100 ÷ 120,000 x 360

Since reverse charge sales are VAT free, VAT is often recognized only in reverse charge purchases.

However, reverse charge sales generally need to be reported to the taxation authority even when they are not given accounting recognition.

In the VAT report filed with the taxation authority, the asset and liability would be reported as separate items. Consequently, many companies keep separate accounts for VAT assets and VAT liabilities.

For IFRS | US GAAP purposes, since the amounts are offset, they would not be reported, so it makes no difference how or if they are given accounting recognition.

Also note, in some jurisdictions, all reverse charge transactions must be reported. In some jurisdictions, only transactions over a set amount. In some, jurisdiction just sales transactions. In some jurisdictions, multiple reports require the reporting of the same transactions (just on different forms and at different times). These reports generally include the VAT #, invoice # and amount.

This example is no substitute for knowledge of the specific requirements of each jurisdiction.

VAT is generally due when consideration is received (as in this example) or receivable (previous examples).

For illustration purposes, only the VAT remittance associated with this transaction is presented.

IAS 24.23 (emphasis added): 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 (emphasis added): 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:

1. the amount of the transactions;
2. the amount of outstanding balances, including commitments, and:
1. their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement; and
2. details of any guarantees given or received;
3. provisions for doubtful debts related to the amount of outstanding balances; and
4. 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:

1. The nature of the relationship(s) involved
2. 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
3. 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
4. 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
5. The information required by paragraph 740-10-50-17.

ASC 310-10-30-6 states: Paragraph 835-30-25-11 explains that, in the absence of established exchange prices for the related property, goods, or services or evidence of the fair value of the note (as described in paragraph 835-30-25-2), the present value of a note that stipulates either no interest or a rate of interest that is clearly unreasonable shall be determined by discounting all future payments on the notes using an imputed rate of interest as described in Subtopic 835-30...

Note: ASC 835-30-25-11's text is practically identical to ASC 310-10-30-6.

IAS 24.23 (emphasis added): 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 (emphasis added): 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:

1. the amount of the transactions;
2. the amount of outstanding balances, including commitments, and:
1. their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement; and
2. details of any guarantees given or received;
3. provisions for doubtful debts related to the amount of outstanding balances; and
4. the expense recognised during the period in respect of bad or doubtful debts due from related parties.

ASC 850-10-50-1 (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. The disclosures shall include:

1. The nature of the relationship(s) involved
2. 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
3. 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
4. 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
5. The information required by paragraph 740-10-50-17.

ASC 310-10-30-6 states: Paragraph 835-30-25-11 explains that, in the absence of established exchange prices for the related property, goods, or services or evidence of the fair value of the note (as described in paragraph 835-30-25-2), the present value of a note that stipulates either no interest or a rate of interest that is clearly unreasonable shall be determined by discounting all future payments on the notes using an imputed rate of interest as described in Subtopic 835-30...

Note: ASC 835-30-25-11's text is practically identical to ASC 310-10-30-6.

For example, some time ago an EU based company decided to list its shares on a US exchange.

After retaining an underwriter, the underwriter retained us to draft a financial report consistent with US GAAP.

After reviewing the preliminary results, the underwater decided against pursuing a listing.

IFRS 9.3.2.12 (emphasis added): On derecognition of a financial asset in its entirety, the difference between:

1. the carrying amount (measured at the date of derecognition) and
2. the consideration received (including any new asset obtained less any new liability assumed)

shall be recognised in profit or loss.

ASC 860-20-40-1A (edited, emphasis added): Upon completion of a transfer ... to be accounted for as a sale, the transferor(seller) shall: ... (d) Recognize in earnings any gain or loss on the sale...

As the sale was without recourse, XYZ reversed the previously recognized expense.

As outlined in IFRS 15.113 | ASC 606-10-50-4, for each reporting period entities must disclose (b) impairments of receivables.

This implies that companies should match the impairment to revenue.

Traditionally, only expenses are matched (losses are recognized as incurred).

Also traditionally, the proper procedure for adjusting expenses is to reverse them.

However, both IFRS and US GAAP refer to the income statement item related to uncollectible receivables as a loss (this is also mirrored in their respective taxonomies).

This implies, since the accounting for losses is more flexible, simply netting the loss would not be inconsistent with the letter of the guidance.

As outlined in IFRS 93.2.10 to 14 | ASC 860-50-25-1 to 10, if a company sells a financial asset but retains the right to service the asset for a fee, it recognizes a servicing asset.

Theoretically, it could also recognize a servicing liability if the fee does not adequately compensate the company for its service, but this is not common.

For illustration, this example assumes the total cost (interest plus fee) was the same 10% as in the discount example. This may or not be realistic.

In practice, the cost of factoring, pledging and assigning varies considerably depending mostly on the quality of the receivables being factored, pledged or assigned.

In most agreements, this cost is a outlined as a benchmark rate plus points.

Note: IFRS | US GAAP uses IBOR (inter-bank offered rates) | SOFR (Secured Overnight Financing Rate) as its benchmark rate.

However, companies are free to use whatever benchmark they like in agreements they sign between themselves.

As neither IFRS nor US GAAP specifically addresses how to classify the costs associated with factored receivable, in practice they are commonly recognized as outlined in the agreement.

Neither IFRS nor US GAAP specifically address how these fees should be classified.

Consequently, the fee is commonly treated like interest and sub-classified in non-operating (other) expense.

In US GAAP XBRL, it should thus be presented as an extension to OtherNonoperatingIncomeExpense.

As IFRS XBRL does not define a similar label, it should be presented as an extension to FinanceCosts.

Note: as this fee is akin to interest, it would not be an error to present it as an extension to InterestExpense.

While IFRS XBRL does not include an InterestExpense label under IncomeStatementAbstract, it does under AnalysisOfIncomeAndExpenseAbstract.

In general, pledging involves a pool of receivables being used as collateral for a loan.

In contrast, assigning generally involves specific receivables being assigned to a lender.

While not set in stone, receivables are usually pledged at a discount.

In contrast, receivables are generally assigned at face value plus interest and/or a fee.

For example, XYZ transferred the receivables at face value agreeing to pay 5,000 interest and a 5,000 fee in 90 days.

In 90 days

As neither IFRS nor US GAAP specifically addresses how to classify the costs associated with factored receivable, they are commonly recognized as outlined in the agreement.

If the agreement includes a fee, it is commonly treated like interest and sub-classified in non-operating (other) expense.

In US GAAP XBRL, it should thus be presented as an extension to OtherNonoperatingIncomeExpense.

As IFRS XBRL does not define a similar label, it should be presented as an extension to FinanceCosts.

Note: as this fee is akin to interest, it would not be an error to present it as an extension to InterestExpense.

While IFRS XBRL does not include an InterestExpense label under IncomeStatementAbstract, it does under AnalysisOfIncomeAndExpenseAbstract.

If the transferee can return the receivables to the transferor, the transferee has recourse. Recourse transaction do not generally qualify for sale accounting. Instead, they are recognized as a secured borrowings.

While they provide similar guidance, IFRS is more straight forward than and US GAAP.

The same guidance applies when factor has an option to return the receivables for reasons other than un-collectability.

Same facts except, the default rate was insignificant.

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

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

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.

IFRS 15 and ASC 606 both stipulate that uncollectible accounts should be recognized as losses.

However, as these losses are recognized at each reporting date, they are generally matched with revenue as if they were expenses.

Further, many companies consider uncollectible accounts be expenses.

Specifically, if a company wants to avoid bad debts, it can sell COD.

Many companies avoid this because the drop in revenue will often more than offset any savings.

For the same reason, they also classify the expense as selling or distribution.

Nevertheless, since both IFRS and US GAAP state that these losses are losses, many companies report them as such.

Consequently, both approaches are encountered in practice (example one, example two).

Note: these annual reports have been copied to a local server to avoid potentially broken links.

Readers are advised to download the originals from the company pages.

Both US GAAP and IFRS require companies to estimate credit losses (doubtful accounts, uncollectible accounts, bad debts) 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, US GAAP gives more detailed guidance than IFRS .

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.

XYZ reversed the write-off.

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

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

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

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.

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

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.

IFRS 15 and ASC 606 both stipulate that uncollectible accounts should be recognized as losses.

However, as these losses are recognized at each reporting date, they are generally matched with revenue as if they were expenses.

Further, many companies consider uncollectible accounts be expenses.

Specifically, if a company wants to avoid bad debts, it can sell COD.

Many companies avoid this because the drop in revenue will often more than offset any savings.

For the same reason, they also classify the expense as selling or distribution.

Nevertheless, since both IFRS and US GAAP state that these losses are losses, many companies report them as such.

Consequently, both approaches are encountered in practice (example one, example two).

Note: these annual reports have been copied to a local server to avoid potentially broken links.

Readers are advised to download the originals from the company pages.

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.

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