Question

You are performing the audit of XCO, a public compnay. Bubba Smith, the inventor who founded XCO is still the majority shareholder. Bubba and his two daughters comprise the majority of senior management for the company and hold three of the seven seats on the board of directors. You are testing accounts recieveable and notice that some are from Bubba and his daughters. Interest is not specified in the notes. Identify applicable ASC and IFRS standards on the issues raised in this case.

Answer 1

The Accounting Standards Codification (ASC) and the International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Standards Board. This standards have to be followed by all companies, particularly those that are public companies, listed on stock exchanges. The main provisions of these standards is to ensure that an entity provides adequate disclosure in its financial statements for user’s to evaluate.

Coming specific to the Accounts Receivables part of the standards the MAIN PROVISIONS are as follows –

1.    The nature of credit risk inherent in the entity’s portfolio of financing receivables

2.    How that risk is analyzed and assessed in arriving at the allowance for credit losses

3.    The changes and reasons for those changes in the allowance for credit losses.

The credit risk here denotes the CREDIT QUALITY of the accounts receivables of the entity.

The accounts receivables of the entity have arisen because of a sale provision or service provision arrangement with the client who is the debtor to the entity. Receivables may arise from credit sales, loans, or other transactions. Receivables may be in the form of loans, notes, and other types of financial instruments and may be originated by an entity or purchased from another entity.

Thus –

Accounts receivables represents a contractual right to receive money in either of the following ways:

a.    On demand

b.    On fixed or determinable dates.

The accounts receivable is thus recognized as an asset in the entity’s statement of financial position. The accounts receivables form the LIQUID CASH ASSETS of the entity and form a very important part of the working capital of the entity necessary for the day to day functioning of its business.

The guidance notes in paragraphs 310-10-50-6 through 50-8 of the ASC with respect to Trade receivables or accounts receivables states that -

Trade accounts receivables have the following characteristics:

1. They have a contractual maturity as per the credit period of their transactions.

2. They arose from the sale of goods or services.

The policy for recording payments received on trade receivables and the the policy for resuming accrual of interest on over due accounts receivables.

The standards clearly determine whether the payments have been received on contractual terms and whether interest is accrued on receivables after their due date.

An entity shall provide an analysis of the age of the accounts receivables at the end of the reporting period together with accrued interest after the payment date.

According to IFRS Accounting Standard 32, trade receivables are classified as a financial asset, namely an asset that is a contractual right to receive cash or another financial asset from another entity. Most businesses’ purpose with trade receivables is to collect the cash flows associated therewith. These cash flows are usually only the repayment of the principal amount (amount of goods or services sold on credit) as well as interest levied on outstanding amounts (if payment is made after the normal credit period). Therefore most trade receivables will fall within the definition category of IFRS 9. Interest is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time.

So coming back to the specific part of the question, the accounts receivable that is due from Bubba and his daughters have to be properly evaluated and interest accrued on the dues after their payment dates.

Further more from a balance sheet disclosure point of view, the receivable get classified as due from interested parties of the entities. They thus need to be disclosed accordingly.