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Accounts Receivable: Financial Accounting and Auditing (Portfolio 5110)

This Portfolio comprehensively explains and analyzes financial accounting and auditing of accounts receivable and associated items.

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DESCRIPTION

This Portfolio comprehensively explains and analyzes financial accounting and auditing of accounts receivable and associated items. Most enterprises that sell goods or provide services do not instantaneously collect amounts due from customers. Consequently, most enterprises need to understand how to value, record, and present accounts receivable in their financial statements.
After Section I of the Portfolio, which imparts fundamental principles concerning accounts receivable, Section II explains how to value and present accounts receivable on balance sheets. The section analyzes both accounts receivable and allowances for doubtful accounts. Section II also addresses barter transactions and various other issues that affect accounts receivable.
Section III focuses on bad debt expense and the allowance for doubtful accounts.
Section IV explains how to calculate interest on accounts receivable. It distinguishes implicit interest from explicit interest and also explains how to evaluate the materiality of implicit interest expense.
Section V discusses disclosure practices and provides examples.
Section VI explores the relationship between accounts receivable and accounting for income taxes under FASB Accounting Standards Codification (ASC) Topic 840, as based on FASB Statement No. 109, Accounting for Income Taxes. However, readers seeking broader coverage of accounting for income taxes should consult either BNA Tax and Accounting Portfolio 5000-4th, Ernst & Young LLP, Accounting for Income Taxes: FAS 109, or BNA Tax and Accounting Portfolio 5001, Howell & Walther, Accounting for Income Taxes: Fundamental Principles and Special Topics.
Sections VII and VIII, respectively, explore two common transactions involving accounts receivable: factoring and securitizing.
The Portfolio's final two sections augment the preceding discussions of financial accounting practices. Section IX explains how auditors test and evaluate accounts receivable. Section X surveys SEC enforcement activity related to accounts receivable.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5110-2nd, Howe and Mitschow, Accounts Receivable: Financial Accounting and Auditing (Accounting Policy and Practice Series).


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AUTHORS

HARRY HOWE, PH.D.
Harry Howe, B.A., Brown University; MBA (Accounting), Graduate Management Institute, Union College; Ph.D., Union College. Associate Professor and Coordinator of Accounting Program, State University of New York (SUNY), College at Geneseo. Member, New York State Society of CPAs; Rochester chapter of the IMA; Rochester chapter of the FEI; and American Accounting Association. Published work has appeared in The Review of Business Information Systems; The CPA Journal; Journal of Business Valuation and Economic Loss Analysis; Decision Sciences Journal of Innovative Education; Strategy and Games; Strategic Finance; International Quarterly Journal of Marketing; The International Journal of Management; and the Journal of Accounting, Taxation and Finance for Business. Prior to completing doctoral studies and joining the accounting faculty at Geneseo, Dr. Howe managed a NYC-based construction company and practiced as a commercial real estate broker in the Hudson Valley.

MARK C. MITSCHOW, PH.D.
Mark C. Mitschow, Ph.D. (Accounting), University of Maryland at College Park. Associate Professor of Accounting, State University of New York (SUNY) at Geneseo, teaching primarily financial accounting courses. His research interests include business ethics, the financial services industry, and the accounting profession. Dr. Mitschow has authored 15 peer-reviewed articles (in journals including Research on Professional Responsibility and Ethics in Accounting, The CPA Journal, and the Journal of Business Ethics) and 24 conference presentations.

TABLE OF CONTENTS

Detailed Analysis

I. Fundamental Principles and Scope of Portfolio

Introductory Material

A. Essentials of Accounts Receivable

1. Definitions; Events Giving Rise to AR

2. Business Context and Impact on Reporting Standards

a. Working Capital

b. Operating Cycle

c. Transferring AR

d. Managing AR

3. Bad Debt Expense (BDE)

B. Historical Perspective

C. Scope of Portfolio

D. Related Topics Treated in Other BNA Portfolios

II. Valuation and Presentation of Accounts Receivable

Introductory Material

A. Importance of Context

B. Basic Facts of Recurring Example

C. Elements of the AR Balance

1. Asset Account: AR

a. Operational and External Reporting Perspectives

b. Recognition of AR and Associated Revenue - Current Sales

c. Recognition of AR and Associated Revenue - Long-Term Contracts

d. Recognition of AR and Associated Revenue - Intermediate-Term Contracts

e. Presentation

2. Contra Asset Accounts: Allowance for Doubtful Accounts

a. Credit Loss

b. Claims and Unauthorized Deductions

c. Presentation

D. Disclosure

1. General Requirement and Reference to Worksheet

2. Presentation of Fair Value

3. Change in Estimated Returns

E. Receivables Denominated in Foreign Exchange

F. Barter Transactions

1. Scope of Analysis

2. Barter Transactions Involving Barter Credits

3. Direct Barter Transaction

a. Treatment as an Ordinary Sale

b. Gain Treatment

c. APB 29 Treatment

d. No Recognition of Transaction

e. Loss Treatment

f. Deferred Revenue (or Contra Asset), Ratable Amortization to Revenue Over the Life of the Asset, and Disclosure

G. Other Issues Affecting AR Accounting

1. Warranties

2. Interest

3. Prior Period Adjustments

4. Uncertainty and Nonrecognition of AR

5. Collection Costs and Acquired AR

6. AR Valuation for Gross and Net Transactions

III. Bad Debt Expense and the Allowance for Doubtful Accounts

Introductory Material

A. Estimation Procedures

1. Percentage of Sales

a. Benefits

b. Objections

2. Aging AR

a. Statistical Sampling

b. Aging and Business Unit

i. Globally

ii. At Business Units

iii. By Customer Experience Across Business Units

c. Precision of the Estimate

d. Design of the Aging Buckets

i. Inclusion of Discount Period as an Aging Bucket

ii. Aging Schemes

iii. Half Month Buckets

3. Subjective Methods

a. Ad Hoc

b. Corporate Systems

c. Expert Systems

4. Payment Pattern and Management Science Approaches

B. Write-Off

C. Recovery

1. Recovery Through Customer Payments

2. Recovery Through Credit Insurance

a. Representative Credit Insurance Products

b. Accounting Treatment for Recoveries

D. Bankruptcy

IV. Interest on Accounts Receivable

Introductory Material

A. Implicit and Explicit Interest

1. U.S. GAAP on Implicit Interest

2. U.S. GAAP on Explicit Interest

B. Calculating Explicit Interest Charges on AR Balances

1. Grace Period

2. Net Due on Purchase

3. Simple Average

4. Nominal Month

C. Evaluating the Materiality of Implicit Interest Expense for Trade Receivables

1. The Cash Gap

2. Presumption That Cash Gap Is Financed With Debt

a. Application of the INT Metric

b. Decomposition of Profit and Operations

3. Recording AR at Present Value

D. Implicit Interest on AR - Prospective GAAP

1. U.S. GAAP

2. International Accounting Standards

E. Empirical Effects of Implicit Interest Recognition

1. Cash Gap Calculations

2. Implicit Interest Calculations

F. Interest Receivables

G. Interest-Bearing Receivables

1. Leasing Companies

2. Commercial Banking â€" Lending Receivables

3. Real Estate Sales

V. Disclosure Practices and Examples

Introductory Material

A. Concentrations of Credit Risk

B. Reconciliation of AFDA Account

1. Sample Disclosure Under Regulation S-X § 210.5-04

2. Augmented Disclosure

C. Accounting Policy and Business Models

D. Interest and Collections

E. Use of AR to Secure Financing

F. Accounting for Joint Venture AR

G. AR and Third Party Rate Adjustments

VI. AR and Accounting for Income Taxes

Introductory Material

A. Tax Accounting for AR

B. Accounting for Income Tax Under U.S. GAAP

1. Reconciling GAAP and Tax Code Calculations

2. Loss Carryforwards and Carrybacks

C. Bad Debt Expense Under the Internal Revenue Code

1. Establishing Uncollectible AR

2. Special Problems Related to Deductibility of Uncollectible AR

3. Treatment of Uncollectible AR Under Other Methods of Accounting for Income Taxes

a. Uncollectible AR Under the Cash Basis

D. Uncollectible AR Under the Non-Accrual Experience Method

E. Special Cases Involving AR and Income Tax

1. AR on Installment Sales

2. AR on Intracompany Sales

3. AR Resulting From Overseas Transactions

4. The Tax Impact of Writedowns and Deductions of AR

5. Impact on AR of Changes in an Enterprises's Tax Status

VII. Factoring of Accounts Receivable

Introductory Material

A. Perspectives

B. Accounting for AR Factoring

C. Special Cases

1. AR Factoring in the Healthcare Industry

2. Export Factoring

a. Advantages

b. AR Factoring Risk to Lenders

3. Credit and Factor Insurance

VIII. Securitization of Accounts Receivable

Introductory Material

A. Distinguishing Sales From Secured Borrowings

B. Asset Transfer Issues Related to AR

C. AR-Related Asset Transfers

1. Determination of Control

2. AR-Related Asset Transfers and Special Purpose Entities (SPEs)

3. Measurement of Interests Held After Transfer

a. Recording Transfers Where All Interests Are Transferred

b. Recording Transfers Where Some Assets Have Been Retained

4. Servicing Assets and Liabilities on Transferred Assets

D. Types of AR Securitizations

1. Revolving-Period Securitizations

2. Variable Interest Entities (VIEs)

E. Special Issues Regarding AR-Related Asset Transfers

1. AR Securitization Limitation in the Healthcare Industry

2. Canadian AR Securitization Requirements

IX. Audit Issues Related to AR

Introductory Material

A. The Audit Process

1. Planning

a. Acceptance of the Audit Engagement

b. Analytical Procedures

c. Business Risk

d. Fraud Considerations

2. Internal Control Assessment

3. Substantive Tests

4. Rendering an Audit Opinion

B. Audit Design Procedures

1. The Revenue Cycle

2. Financial Statement Fraud Considerations

a. Types of Misstatements

b. Audit Testing for Fraud

c. Indicators of Improper AR Valuation

3. Significant AR Auditing Tests

a. Detail Tie-in

b. Confirmation of AR Balances

c. Cutoff Tests

4. Audit Sampling Techniques

a. Nonstatistical Sampling Methods

b. Dollar Unit Statistical Sampling

5. Common Departures From GAAP

C. Case Studies for AR Auditing

1. Boeing Corporation

a. Operations Objectives Audit

b. Financial Reporting Objectives Audit

c. Compliance Objectives Audits

d. Control Components Assessment

2. California Federal Bank

a. Continuously Monitor Business Activity and Performance Indicators

b. Leverage Other Department's Work Where Possible

c. Risk-Adjusted Audit Planning

d. Involvement in Information Technology (IT) Initiatives

D. Industry-Specific Cases in AR Auditing

1. AR Audit Issues for Computer Software Firms

2. AR Audit Issues for the Construction Industry

3. AR Audit Issues in the Health Care Industry

4. AR Audit Issues in the Newspaper Publishing Industry

E. SOX and AR Auditing

X. SEC Enforcement Activity Related to AR

Introductory Material

A. History and Institutional Context

1. Types of SEC Enforcement Actions and Related Communications

a. Types of Enforcement Actions

b. SEC Regulations and Communications

i. Integrated Disclosure System

ii. Other Regulations

iii. Communications and Rulings - Types

iv. Communications and Rulings - Searching and Retrieving Documents From Public Sources

v. Communications and Rulings - Conceptual Distinctions

2. How SEC Investigations Are Initiated

a. Statutory Authority

i. Section 10(b) of the 1934 Act

ii. Section 11 of the 1933 Act

b. Leads

3. Publicity

4. Role of SEC Investigations and Enforcement Actions

5. Trends in Types and Number of AAER

6. Responding to an SEC Investigation

B. Exposures Concerning AR

1. Defective Accounting

a. AR & Revenue Recognition Issue

b. Understatement of Bad Debt Expenses

c. Materiality

i. Materiality and Financial Statements

ii. Materiality and Individual Transactions

2. Earnings Management

3. Management Discussion and Analysis

a. MD& A Requirement

b. Review of the Periodic Reports of the Fortune 500 Companies

c. General Purpose of and Approach to MD& A

d. MD& A of Liquidity

e. MD& A of Critical Accounting Estimates

Working Papers


WORKING PAPERS

TABLE OF WORKSHEETS

Worksheet 1 Glossary - Abbreviations and Acronyms

Worksheet 2 Glossary - Terms

Worksheet 3 Disclosure Checklist With GAAP Sources

Worksheet 4 Generally Accepted Auditing Standards (GAAS)

Worksheet 5 Principal Accounting Pronouncements Cited

Worksheet 6 Summary Accounting for Transfer of AR

Worksheet 7 Examples of Pertinent Disclosures by Selected Public Companies

Bibliography

OFFICIAL

Statutes

Regulations

U.S. Securities and Exchange Commission (SEC):

SEC Staff Accounting Bulletins

SEC Accounting Series Releases

SEC Financial Reporting Releases

SEC Rules and Interpretations

SEC Filings

Internal Revenue Service (IRS):

Internal Revenue Code

IRS Publications

IRS Tax Topics

Accounting Principles Board (APB):

APB Statements

APB Opinions

American Institute of Certified Public Accountants (AICPA):

AICPA Audit and Accounting Guides

AICPA Statements of Position

AICPA Statements on Auditing Standards (as codified)

AICPA Accounting Research Bulletins

Emerging Issues Task Force (EITF):

EITF Issues

Financial Accounting Standards Board (FASB):

FASB Concepts Statements

FASB Interpretations

FASB Statements of Financial Accounting Standards

Governmental Accounting Standards Board (GASB):

GASB Statements

Public Company Accounting Oversight Board (PCAOB):

PCAOB Interim Auditing Standards (as codified)

Policy Statements

International Accounting Standards Board (IASB):

International Accounting Standards

UNOFFICIAL

AICPA

Books and Textbooks

BNA Portfolios

Journal Articles

Miscellaneous