Accounting Treatment Of Trade Receivables: Guidelines And Best Practices For Financial Reporting

Selling of Trade Receivables

A)

In present report being the charted accountant of Dynamic Co. Ltd. it has been asked by the company to ensure that certain issues that are being faced by the entity in respect of the accounting treatments that has to be concluded in respect of certain items of the financial statements are taken care of. It has been found that on 31^st December 2006 the company sold its receivables to a factoring company (Scott 2015). It is very unlikely that the debtors who have been sold are going to default in the future payments that are due from them. It has been guaranteed by the company to the factor in case the debtors fail to repay the amounts receivable to the factoring company, it will reimburse the amount to the factoring company. By selling 90% of the debtors that were being held by the company, the company was able to realise $90 million. It is also seen that the receivables and their corresponding amount has not been recorded in the financial statements of the company. In addition to that the amount that was not received from the debtors was written off against the retained earnings of the entity. For the purpose of determining the validity and the propriety of the accounting treatment transacted by the company it is necessary to refer to the guidelines that are present within the standards (Henderson et al. 2015). These standards are being issued by the regulatory body of the entity and are in accordance with the guidelines that were being issued by the International Financial Reporting Standards.

After the in depth analysis of the present situation it can be concluded that the company refrained from including the amount of trade receivables in its financial statements due to the fact that it wanted to increase the earnings that is  being transacted by it. This is done by the corporates especially in situations wherein the entity has a pre-determined target of profit that has to be achieved by it. The financial position that the entity wants to reflect to the stakeholders of the company clearly gets affected in a negative way if the amount corresponding to the trade receivables of the entity is immense and significant (Amiram et al. 2018). Due to this reason the companies engage themselves in selling off the receivables at the end of the financial year so that the amount in respect of the receivables is not included in the financial statements of the company. The reason for the selling off the receivables by the company includes the following:

1. The entities are in immediate need for cash and the time that will be taken up by the receivables of the company is huge and the only option available with the company is to sell of the receivables for the purpose of realising the cash immediately.
2. The entities do not feel comfortable in respect of taking the credit risks of the clients.
3. The entities do not want to indulge themselves in the businesses that need continuous monitoring of the collection of the debtors (Perera and Chand 2015).
4. The entities might have to resort to window dressing for reflecting a nice picture of the financial statements.

Guidelines for Recognition and De-recognition of Assets

In the present case the company has sold the receivables to a factoring entity on 31^st of December in the year 2016. The reason for the sale of the receivables by the entity can be attributed to the delayed payment that is being indulged in by the debtors of the company. This ascertains the fact that the main reason for the selling off the receivables by the company can be attributed to the fact that the receivables of the entity can only be collected by the entity in the next financial year (Tsunogaya 2016). The selling of the receivables will significantly improve the profitability and the liquidity that is being demonstrated by the company in the financial statements of the company in the annual report prepared by it.

The issue is regarding the recognition of the receivables in the financial statement of the company. It has to be understood that the entities may engage in the process FO recognising an asset as well as in the process of DE recognition of the asset. It is thus stated that the process of recognition of the assets is much easier than the process of de-recognition of any of the assets that are held by the company (Christiaens et al. 2015). the company must make sure that it is in compliance with the guidelines as issued by the standard IFRS 9 in respect of the recognition and the de-recognition of the assets of the company. As per the guidelines of this standard for the purpose of recognition or de-recognition of any of the asset in the financial statement of the entity the risks and the rewards that are associated with the assets will have to be transferred along with the ownership of the assets. In the present case of the company the risks and the rewards that are associated with the receivables of the entity have not been fully transferred to the factoring entity and hence the entire amount of the receivables of the entity cannot be de-recognised from the financial statements of the entity. The journal entry in this respect is as follows:

B)

In the given case, it is provided that the corporate entity of Dynamics had initiated the construction of the new distribution centre. The cost of the project will be funded by loans from various banks. In accordance with IAS 23, qualifying asset are those assets that takes substantial time to be ready to put to use. Therefor it can be said that the construction of distribution centre is a qualifying asset (Naranjo et al. 2017). The interest accrued on such construction will be capitalised until the time of completion of assets. For the construction of the asset, the company had taken two loans from the financial institution $3 million at the rate of 4.5% and $2 million at the rate of 5%. The weighted interest rate amounts to ($2m x 6%) + ($3m x 4.5%) / $5m = 5.1% (say 5%).the borrowing cost capitalised will be $ 4.5*5 %*( 8/12) =$0.15 million. Moreover, it has been suggested by IFRS 9 that the financial instruments that can be used for acquiring the required amount of money firm can be utilized for meeting any need of the organisation.

Treatment of Borrowing Costs Incurred in Construction of Assets

Calculation of total interest:

2). The worldwide recognition has been gained by the International Reporting Financial Standards for providing appropriate guideline for treatment of various financial components of financial statement by the corporate entities. It can be seen that most of the corporate entities maintain their books of accounts in accordance to this guideline. The regulatory body had designed the accounting standards in such a way that the all the corporate entities around the globe is accepting them and following the guidelines (Ge et al. 2017). According to many surveys conducted by various organisation, it is observed that a large number of corporate entities are getting attracted towards the accounting standards that were issued by the International financial reporting standard board. However, the accounting standard comes along with some disadvantages. The advantages and the disadvantages of the International Financial Reporting Standards by the corporate entity that have adopted the system are discussed under this section:

Advantages of IFRS are listed as follows:

• The International Financial Reporting Standards are designed in way that the business entities are more focused from the investors viewpoint. Implementing the International Financial Reporting Standards in the preparation of the financial statement will make the financial statement more comprehensive, timely and accurate in the nature. Further if the financial statements made by the corporate entities by a single tool it will be easier to understood.
• The other important advantage of the IFRS is that according to this rules, the losses are recognised immediately and such is effected in the books of accounts. In the International Financial Reporting Standards, the losses are to be recognised immediately even if such losses yet not occurred to the entity. The adequate provisions are required to be made in order to ascertain the future expected losses. Further, this will help the lenders to ascertain the financial position of the company. Implementing the International Financial Reporting Standards will increase the amount of transparency of the financial statements. In addition to this another, major advantage of IFRS is timeliness.
• Implementing the International Financial Reporting Standards enhance the particular quality of the financial statements on which comparisons could be made. The accounting standards issued by the International Financial Reporting Standards are adopted mostly by all famous corporate organisation in entire world. The aim of the International Financial Reporting Standards is to provide a common platform so that comparisons and understanding by the management of the different corporate entities for ascertaining the performance of the organisation (Francis et al.2015).
• The International Financial Reporting Standards has removed the trade barrier of the related entities even if there is constitutional barrier by helping the organisations in preparing the financial statements that are easily comparable.
• Post adoption of the International Financial Reporting Standards has improved the consistency and the transparency of the financial statements.
• Investment in the foreign markets and in the capital markets that are foreign in nature are easily accessible by the implications of the International Financial Reporting Standards. The implications if IFRS has provided a better and smooth access to the foreign market.
• The relevance of the accounting statements also improve the implementation of the International Financial Reporting Standards. The new IFRS standards is giving more importance on the substance over the legal form of the object. It reveals an improved quality of the financial statements as the balance sheet of the company and other financial statement is made on the requirements of the IFRS. This means that the balance sheets prepared on particular regime are more useful in nature due to the consistency and the layout of the financial statement as this are made in accordance to the relevant accounting standard (Edogbanya and Kamardin 2014).
• The adoption rate by the multinational corporations has increased, as the implementation of the International Financial Reporting Standards have also been cost effective and time saving.

The obstacle of IFRS can be listed down as follows:

• As the corporate entity has to make the already existing standard compatible with the new standard and has to arrange for the imparting of the proper training to the employees in the usage of the new accounting standard. The major disadvantage in regards to the adoption of the International Financial Reporting Standards has been that the costs that is to be incurred by the multi nationals is huge.
• all the corporate entities in a particular country cannot be enforced to comply with the International Reporting Financial Standards (Cheng et al. 2014).
• In the International Reporting Financial Standards, the items of extra ordinary nature are not permitted to be recognise. This disadvantage eliminates the assertion of the loss and the gains of the organisation.
• There is a contradiction of International Reporting Financial Standards and Generally Accepted Accounting Principles. The entities following the Generally Accepted Accounting Principles might be reluctant to comply with the International Financial reporting Standards. However, it is ascertained that the firms adopting this particular accounting standard will represent that financial statements more accurately and in complete manner.
• The financial statements are hard to understand, as the amounts values are different for every country because of the foreign currency fluctuation.
• Finally, the implications of the International Reporting Financial Standards is more complicated to deal with. As the regulations and the procedure is more complex in nature (Flower 2016). The International Reporting Financial Standards is contextual. The reporting also states various method that might be applied on the different cases. The management is responsible for the determination purpose. the responsibility of the recording is depends on the management, if the management fails to ascertain the correct way then the relevance of the International Reporting Financial Standards will be abolished . The effectiveness of the statements depends on the accuracy of the financial statements. If the entity has chosen wrong assumptions then the materiality of the financial statements will not be reliable (Cohen et al. 2017). In case of small scale, business enterprises with limited resources might fails to comply with International Reporting Financial Standards as the financial expertise of the managers and the accountant might be low. Even if the entity tried to comply with them, it will incur substantial expenses that might be huge according to the size of the organisation.

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