Assignment entity. Continuing with the original example, companies

Assignment12-1:  Accounting Research andPresentationTopic:Receivables – credit quality and allowance accountNoraBeth HackerFranklinUniversityACCT310 Q1WW, Intermediate Accounting IProfessorSturgillDecember12, 2017                    Accounts receivable is an asset account used in theaccrual method of accounting that, for example, tracks the amount of credit abusiness extends to its customers.  Acustomer receives a product from a company,and an invoice is given to the customer to pay later.  The total of the invoice is documented by thecompany to indicate what is owed by the customer.  In this specific case, because these forms ofinvoices are paid by the customer usually inside of one year, the accounts receivableaccount is determined to be a short-term asset account.

  FASB (FASB, 310-10-05-4) indicates that notonly credit sales are accounts receivables, but also loans and othertransactions, indicating accounts receivable,depending on the length of time outstanding, may be long-term assets.  FASB 310-10-45-2 instructs that long-term receivable, such as a trade, a loan, or notereceivable, are to be indicated in a separate category on the balance sheet.Furthermore, transactions may arise by the company itself or purchased fromanother entity.Continuing with the original example, companiesrealize that some customers who receive credit will never pay their accountbalances.  FASB (310-10-35-4) recognizesthe allowance and gives guidance for companies to fully analyze past events andcurrent conditions to conclude that a loss needsto be recognized.

If the analysis supports that a loss is going tohappen, appropriate adjustments are allowed. The analysis should be ongoing and consistent with each accounting cycle (FASB, 310-10-35-13).With the allowance for losses, as in the originalexample, companies have latitude on how to estimate the loss (FASB,310-10-35-20).

For example, the company canassess a bad debt as a percentage of sales for the period, or as a percentageof the accounts receivable balance.   Themethod used is allowable if it reasonably estimated and reflects an adequateestimate of future cash flows (FASB, 310-10-35-22).An adjustment is made atthe end of each accounting period to approximate bad debts based on the companyactivity during that accounting cycle.Established companies rely on prior experienceto approximate unrealized bad debts, but new companies must rely on issuedindustry averages until they have adequate experience to make their estimates(FASB 310-10-35-10).

  The adjusting entryto approximate the expected worth of bad debts does not lower accountsreceivable directly. Accounts receivable is a control account that must havethe identical balance as the collective balance of every individual account inthe accounts receivable subsidiary ledger. When recordingthe adjusting entry, the exact customer accounts that will become uncollectibleare not known.  Therefore the recordedadjusting entry is made to the contra-asset account named allowance for baddebts or allowance for doubtful accounts (FASB, 210-10-45-13).  The contra-asset account reduces the accountsreceivable account on the balance sheet to indicate the net realizable value ofaccounts receivable.

  FASB (FASB, 310-10-50-11B) indicates a companymust disclose qualitative and quantitative information about the credit qualityof the accounts receivable.  Assessmentsused in the allowance method are the responsibility of the management of acompany to advance the accuracy of the financial statements.  All methods require management to assess apercentage approximation based on their perception of the industry, currenteconomic issues, and the customers’ payment history and creditworthiness.  The ASU No. 2010-20 provides direction for acompany to separate new and present disclosures based on how it creates itsallowance for credit losses and how it oversees credit experiences.  Additional disclosures required under ASU2010-20 for financing receivables include: Aging of over-due receivables, Credit quality signs, and Changes in financing receivables.Short-termaccounts receivable, receivables calculated at fair value or lower of cost orfair value, and debt securities are not included in the ASU No. 2010-20.

            The Accounting Standards Update (ASUNo. 2016-13) can provide further guidance to companiesthat are required to measure expected credit losses for financial assets.The ASU requires companies to provide more information in their disclosuresabout the credit quality of their financing receivables and the credit reservesheld against them.  At the release ofthis ASU, ASC Topic 326, Financial Instruments-Credit Loss was added to the US GenerallyAccepted Accounting Principles.  This additional information providedin disclosures would assist financialstatement users in assessing an entity’s credit risk exposures and evaluatingthe adequacy of its allowance for credit losses. The ASU indicates that thecurrent elevated threshold for identification of credit impairments hinderstimely identification of losses.             The GAAP Practice Manual (WG&L, 2017, 3.

3.2) furtherclarifies accounts receivable and the applicable measurement.  In the prior example of this paper, in measuringaccounts receivable, interest calculation is not applicable.  However, there are circumstances in whichcalculating interest is relevant.              The GAAP Practice Manual (WG&L, 2017, 3.3.

3) furtherdetails the ASU No. 2016-13 and the FASB topic 326.   Beginning after December 15, 2019, publicbusiness entities that qualify as SEC filers mustsatisfy that both criteria of reasonable estimation of loss andinformation must be present before the releaseof financial statements.Inthe ASU No. 2016-13, a company duty is to consider all existing relatedevidence when assessing foreseeable credit losses, including facts about pastactions, recent circumstances, and sound and justifiable predictions andeffects for foreseeable credit losses.

That is, while the company can use past adjustments figures as a startingpoint for determining foreseeable credit losses, it has to assess howcircumstances that existed during the past adjustment point may vary from itspresent outlooks and appropriately adjust its estimate of foreseeable creditlosses. However, the company is not obligated to predict circumstances over theagreed life of the asset.  Instead, forthe cycle beyond the cycle for which the company can make sound and justifiablepredictions, the company revisits to past credit loss knowledge.

Furthermore,ASU No. 2016-13 does not advocate an element of account (e.g., an individualasset or a set of financial assets) in the measuring of foreseeable creditlosses. However, a company is obligated to assess financial assets within therange of the pattern on a group (i.e.

, pool) foundation when assets share likerisk traits. If a financial asset’s risk traits are not similar to the risktraits of any of the company’s other financial assets, the company will assess the financial asset individually.  Companies are allowed to disregard presentedexternal data such as credit ratings and other credit loss statistics whenassessing the individual accounts receivable for the prediction of creditlosses.            In conclusion of researching the topic of receivables,credit quality and allowance, the International Accounting Financial Reporting(B3.2.6) concurs with GAAP in that review is to be made at each accountingcycle of receivables that could be impaired. However, it appears that the IAS requires objective measurement that isstricter.  There must be significantevidence that loss is probable.

  Forexample, even if a company, that has a current balance as accounts receivableis no longer showing activity as being publicly traded, does not warrant a lossReferenceAccounting StandardsUpdate (ASU) 2016-13, Financial Instruments — Credit Losses — Measurementof Credit Losses on Financial InstrumentsFASB (FinancialAccounting Standards Board). (n.d.). ASC 310-10-05-4.

Retrieved November21, 2017, from FASB Accounting Standards Codificationdatabase.FASB (FinancialAccounting Standards Board). (n.d.).

ASC 310-10-35-4. Retrieved November28,2017, from FASB Accounting Standards Codification database.FASB (FinancialAccounting Standards Board). (n.d.

). ASC 310-10-35-10. RetrievedNovember28,2017, from FASB Accounting Standards Codification database.

FASB (FinancialAccounting Standards Board). (n.d.). ASC 310-10-35-13. RetrievedNovember28,2017, from FASB Accounting Standards Codification database.FASB (FinancialAccounting Standards Board).


ASC 310-10-35-20. RetrievedNovember28,2017, from FASB Accounting Standards Codification database.FASB (FinancialAccounting Standards Board). (n.

d.). ASC 310-10-35-22.

RetrievedNovember28,2017, from FASB Accounting Standards Codification database.FASB (FinancialAccounting Standards Board). (n.

d.). ASC 310-10-45-2. Retrieved November28,2017, from FASB Accounting Standards Codification database.FASB (FinancialAccounting Standards Board). (n.d.

). ASC 310-10-45-13. Retrieved December1,2017, from FASB Accounting Standards Codification database.FASB (FinancialAccounting Standards Board). (n.

d.). ASC 310-10-50-11B. RetrievedDecember1, 2017, from FASB Accounting Standards Codification database.


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