IFRS: training, methodology and implementation practice for companies and specialists
A joint project of IPB Russia and the magazine “Corporate Financial Reporting. International standards".
Discounting in calculations for IFRS purposes
K. e. n. Deputy Director of the International Audit and Consulting Department of BUSINESS PROFILE JSC.
Effective interest rate for discounting
Discounted value is determined by the formula:
FV n = PV (1 + r) n ,
where FVn - future value in n years (Future Value);
PV - modern, reduced or current value (Present Value);
r - annual interest rate (effective rate);
n is the discount period.
From here current value:
PV = FV / (1 + r) n .
The most interesting and controversial point in this formula is the effective rate. It should be noted that there is no single approach to calculating the effective interest rate for discounting. Experts use various methods to calculate it.
Cumulative method
This method is an adjustment (increase) of the risk-free rate for risks inherent in the country, market, company, etc. For this method, the company needs to establish the influence of individual factors on the value of the risk premium, that is, develop a scale of risk premiums.
d = R + I + r + m + n,
where d is the effective interest rate;
R - risk-free rate of return (%);
I - country risk;
r - industry risk;
m is the risk of unreliability of project participants;
n is the risk of not receiving the income provided for by the project.
The risk-free rate is the rate of return that can be earned on a financial instrument that has zero credit risk. 30-year US government bonds are considered the most reliable investment instrument in the world. If you compare a similar instrument in the same currency, for the same period, on the same terms in Russia, the rates will differ by country risk. If we take bonds with similar conditions, denominated in rubles, and compare them with previous securities, we will get the impact currency risk.
Organizational weighted average cost of capital (WACC) model
The weighted average cost of capital is calculated as the sum of the return on equity and debt capital, weighted by their specific share in the capital structure.
Calculated using the following formula:
WACC = Ks × Ws + Kd × Wd × (1 – T),
where Ks is the cost of equity;
Ws - share of equity capital (%) (balance sheet);
Kd - cost of borrowed capital;
Wd - share of borrowed capital (%) (balance sheet);
T - income tax rate (%).
Capital Asset Pricing Model (CAPM)
In an efficient capital market, future stock returns are assumed to be affected only by market (systemic) risks. In other words, the future performance of a stock will be determined by the overall market sentiment.
Rs = R + b × (Rm – R) + x + y + f,
where Rs is the real discount rate;
R - risk-free rate of return (%);
Rm - average market return (%);
b - beta coefficient, measuring the level of risks, making adjustments and adjustments;
x - premium for risks associated with insufficient solvency (%);
y is the premium for the risks of a closed company associated with the unavailability of information about the financial condition and management decisions (%);
f - country risk premium (%).
You can also contact us for information on rates. open sources of information. In particular, you can use the Bulletin of Banking Statistics of the Central Bank of the Russian Federation, which provides monthly information on the level of interest rates broken down by legal entities and individuals, by currencies and by terms of loan obligations.
Discounting in IFRS
The use of discounting is required by a number of international financial reporting standards.
- According to IAS 18 “Revenue”, discounting must be applied if payment for goods occurs significantly later than their delivery, that is, in essence, this is a trade credit. Finance costs will need to be excluded from revenue at recognition and recognized over the installment period (similar to IFRS 15 Revenue from Contracts with Customers).
- IAS 17 Leases states that leased assets are accounted for at the lower of the present value of the minimum lease payments or the fair value of the property received.
- IAS 36 Impairment of Assets requires an impairment test to be performed when there is an indication of impairment. The recoverable amount of the asset is determined, which is calculated as the greater of the asset's fair value and value in use. An asset's value in use is calculated as the present value of the future cash flows associated with that asset, most often discounted at the weighted average cost of capital rate.
- IAS 37 Provisions, Contingent Liabilities and Contingent Assets states that where long-term provisions are made, the amount of the liability must be discounted.
Example 1
A well was purchased for 20,000 thousand rubles. The service life of a similar well is 20 years. According to the law, when decommissioning a well, it is necessary to carry out restoration work (land reclamation). The estimated cost of these works will be 3,000 thousand rubles. The effective rate is 9%.
According to IAS 16, the cost of liquidation work must be included in the cost of the fixed asset. In this case, the estimated liability must be reduced to its current value:
3,000,000 / (1 + 0.09)20 = 535,293 rub.
Thus, the initial cost of the fixed asset will be formed 20,535,293 rubles. and reserve. Amount 535,293 rub. is a discount. Each reporting period, the provision will increase by the amount of finance costs recognized using the effective rate.
- According to IAS 2 Inventories, IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets, if payment for an asset is made on a deferred basis, finance costs are required to be excluded from the cost of the asset upon recognition and recognized expenses during the installment period.
Example 2
Inventories were purchased under a contract in the amount of RUB 15,000. with deferred payment for 12 months. The market interest rate is 8%. When reflected in accounting, inventories and liabilities are recognized in the amount of discounted future flow: 15,000 / (1 + 0.08)1 = 13,888 rubles.
Amount 1112 rub. - a fee for deferment, which will be recognized as part of finance expenses during the year and will reduce the value of inventories.
- IAS 39 Financial Instruments: Recognition and Measurement also requires the use of discounting. Accounting and valuation of financial instruments in accordance with this standard is carried out until December 31, 2017. From 1 January 2018, the new standard IFRS 9 “Financial Instruments” will be in force, the early application of which is permitted.
New IFRS 9 Financial Instruments
The introduction of the new standard IFRS 9 Financial Instruments has made some changes to the calculation and recognition of impairment compared to IAS 39 Financial Instruments: Recognition and Measurement.Financial instruments are initially recognized at fair value at the transaction date less/plus transaction costs, regardless of the model used to subsequently account for the financial instrument.
A financial asset is recognized at an amount that corresponds to the actual amount of cash or other consideration paid, payable, or rights of claim accrued plus directly attributable costs to the transaction.
Financial liabilities are initially recognized at an amount corresponding to the amount of cash or other consideration received less costs directly attributable to the transaction.
The fair value of assets and liabilities at the time of recognition may differ from the amount of funds received and consideration received, for example, if there is a temporary deferral of payments. In such a case, it is necessary to discount future flows using a market rate to eliminate the delay fee.
A significant difference between the IFRS 9 standard and the IAS 39 standard is that at the time of recognition the company must not only reflect the fair value, but also assess the expected possible risks and create a provision for the initial recognition of financial assets in accounting:
- assets at amortized cost;
- assets carried at fair value through other comprehensive income;
- rent receivables;
- a number of other financial instruments.
For trade receivables and lease receivables, expected credit risks are assessed and recognized over the entire holding period of the instrument.
At each reporting date, it is necessary to assess how expected credit risks are changing, and if they increase significantly, it is necessary to create a reserve for the entire amount of expected losses during the holding period. A significant increase in risk occurs, for example, in the event of a late payment or unfavorable events with the borrower.
The borrower's condition may improve and he will begin making payments in accordance with the agreement. Then, having assessed the risk reduction, you can return to assessing future risks for 12 months.
Since there is no actual impairment in the above cases, financial income should continue to be accrued based on the carrying amount of the asset and the effective interest rate.
If there are indicators of impairment at the reporting date (such as being more than 90 days past due), it is necessary to estimate the amount that is realistically collectible under the contract and discount it at the original effective interest rate. The difference between the carrying amount and the new discounted flow amount is credit losses, you need to create a reserve for them. If there are clear signs of impairment, interest income is accrued only on the amount that can be collected from the client, so the effective rate should be multiplied by the difference between the carrying amount and the provision.
Let's look at the difference in discounting with an example.
Example 3
The company issued a loan in the amount of 200,000 rubles on December 15, 2016. for a period of three years.
Return deadline is December 15, 2019. The rate under the agreement is 11% per annum. Interest is paid annually on December 31st. Interest is calculated monthly. The effective market rate is 14.12%.
According to the developed rules for this type of loans (without obvious signs of risk of non-payment), the probability of default is estimated at 1%.
It is known that as of December 31, 2017, the borrower was 45 days late in payment; for such loans, the probability of default was estimated at 4.0%.
On December 30, 2018, it became known that the borrower was having financial difficulties and payments would not be made in full. According to calculations, the company will be able to receive only 191,036 rubles.
Comparative information on the recognition of financial assets according to IAS 39 and IFRS 9 (in rubles):
Postings According to IFRS 39 According to IFRS 9 Moment of recognition 12/15/2016 DT “Financial asset” (FA)
(statement of financial position, FPP)
CT "Cash" (OFP)
Dt "Profits and losses"
(profit and loss statement, OFR)
CT "Financial asset" (FAP)200 000 200 000
14 35714 357
200 000 200 000
14 35714 357
Dr. “Profit and Loss” (OFR)
CT “Impairment of physical activity” (OPP)-
-1856
1856Reporting period 12/31/2016 Dr. “Profit and Loss” (OFR)
CT “Impairment of physical activity” (OPP)2
2Dt "FA" (OPP) 1149
11491149
1149Reporting period 12/31/2017 Dr. “Profit and Loss” (OFR)
CT “Impairment of physical activity” (OPP)5745
5745Dt "FA" (OPP)
CT “Financial income” (FIR)26 239
26 23926 239
26 239Reporting period 12/31/2018 Dr. “Profit and Loss” (OFR)
CT “Impairment of physical activity” (OPP)30 000
30 00014 093
14 093Dt "FA" (OPP)
CT “Financial income” (FIR)26 837
26 83723 774
23 774Reporting period 12/31/2019 Dr. “Profit and Loss” (OFR)
CT “Impairment of physical activity” (OPP)-
-8304
8304Dt "FA" (OPP)
CT “Financial income” (FIR)26 131
26 13129 195
29 195The movement of debt can also be presented in the form of a table.
According to IAS 39:
Period Interest accrued for the year Debt with interest Payments Carrying value of FA as at 31 December 2016 185 643 1149 186 792 −964 185 828 2017 185 828 26 239 212 06 −22 000 190 067 2018 190 067 26 837 216 904 −22 000 30 000 194 904 2019 194 904 26 131 221 036 −191 036 30 000 0 According to IFRS 9:
Period Debt at the beginning or date of recognition Debt after discounting expected flows taking into account credit losses Reserve upon receipt of FI Interest accrued for the year Debt with interest Payments Provision for impairment at closing The book value of the FA as of December 31 excluding provisions 2016 185 643 1856 1149 186 792 −964 1858 185 828 2017 185 828 26 239 212 067 −22 000 7603 190 067 2018 190 067 168 371 23 774 192 145 −22 000 21 696 191 841 2019 191 841 191 036 29 195 221 03 −191 036 30 000 0
Solution
1. Calculations at the time of recognition of a financial asset 12/15/2016
1.1. We determine the fair value of FA as of December 15, 2016, since interest is paid unevenly and the nominal rate differs from the effective one:
Payment date Amount of payments under the agreement Discount formula Present value of cash flows 31.12.2016 964 = 964 / (1 + 0,1412) ^ (16 / 365) 959 31.12.2017 22 000 = 22 000 / (1 + 0,1412) ^ (381 / 365) 19 167 31.12.2018 22 000 = 22 000 / (1 + 0,1412) ^ (746 / 365) 16 795 31.12.2019 221 036 = 221 036 / (1 + 0,1412) ^ (1095 / 365) 148 723 Total 266 000 185 643
1.2. Let's adjust the book value to fair value:200,000 − 185,643 = 14,357 rubles.
Let's recognize the difference in costs.1.3. We accrue a reserve for assessed financial risks for 12 months:
185,643 × 1% = 1,856 rubles.
2. Calculations at the end of the reporting period 12/31/2016
2.1. We estimate future credit risk as of December 31, 2016. There was no significant increase in credit risk. We create a reserve for 12 months based on the new amount of debt. Debt amount:185,643 + (185,643 × 14.12% × 16 / 365) – 964 = 185,828 rub.
Reserve as of December 31, 2016: RUB 185,828. × 1% = 1858 rub.
Change in reserve in OFR: RUB 1,858. − 1856 rub. = 2 rub.2.2. We accrue and recognize financial income at an effective rate based on the carrying amount:
185,643 × 14.12% × 16 / 365 = 1149 rubles.
3. Calculations at the end of the reporting period December 31, 2017
3.1. We estimate future credit risk as of December 31, 2017. There has been a significant increase in credit risk. We create a reserve based on the entire period of ownership of the asset based on the new amount of debt:185,828 + (185,828 × 14.12% × 1) − 22,000 = 190,067 rub.
RUB 190,067 × 4.0% = 7603 rub.
Change in reserve in OFR:7603 rub. − 1858 rub. = 5745 rub.
3.2. Finance income is accrued and recognized at an effective rate based on the carrying amount:185,828 × 14.12% × 1 = 26,239 rubles.
4. Calculations at the end of the reporting period 12/31/2018
4.1. There are signs of impairment of the financial asset as of December 31, 2018.As of December 31, 2018, we estimate the value of future cash flows, discounted at the original effective rate, taking into account the new cash flow:
4.2. Expected credit losses are:190,067 − 168,371 = 21,696 rubles.
Taking into account the already accrued amount of the reserve in the financial reserve, we recognize impairment in accordance with IFRS 9:21,696 − 7603 = 14,093 rubles.
Reserve according to IAS 39: RUB 30,000. in the OFR.4.3. Financial income is accrued and recognized at the effective rate for 2018:
5. Calculations at the time of disposal of a financial asset 12/16/2019
- from book value to IAS 39: 190,067 × 14.12% × 1 = 26,837 rub.
- from the book value less credit losses on IFRS 9:(190,067 − 21,696) × 14.12% × 1 = 23,774 rubles.
5.1. At the time of loan repayment on December 15, 2018, the amount of the recognized reserve will be RUB 30,000.The OFR reflects additional accrual of credit losses up to RUB 30,000:
30,000 − 21,696 = 8,304 rubles.
5.2. The amount of interest income is calculated as the balance required to close the contract, taking into account the actual payment and the reserve. In our case, it is 29,195 rubles.
Thus, in addition to the issue of the method for calculating the effective discount rate, the introduction of IFRS 9 Financial Instruments introduced additional cases in which discounting is used and defined a new procedure for calculating credit losses.
Discounting method is a method of determining the current value of an investment and is the inverse of compound interest. Accordingly, the current value of an investment is its discounted value. The current value of an investment calculated for n years is equal to the quotient of its future value divided by the nth power of the annual interest rate added to one. There is an article about how this is done and in what circumstances it is used.
Since receivables mean payment deferred in time, therefore, a loan, the creditor has the right to consider it as a financial investment, an investment. Investments should be, at a minimum, risk-free, and, at a maximum, generate investment income. Simply put: if the payment is tomorrow, then the creditor wants to receive the money tomorrow. What amount will this be? This question can be answered by making an appropriate calculation based on the amount that the investor currently has and the conditional interest rate accepted for calculation. Further, when the transaction is concluded and the receivables calculated for the loan period are recognized in accounting, a “countdown” is carried out - discounting. For what and in what cases – this is what the article is about.
Accounts receivable as an investment.
It is well known that the recognition of sales revenue, if the receipt of revenue is deferred in time, occurs simultaneously with the recognition of the corresponding receivables. Accounts receivable are assessed according to the rules, in particular those established by paragraph 73 of PBU 1 and paragraph 6 of PBU 9. These rules regarding receivables for goods (work, services) do not contradict paragraphs. 9 – 10 IAS 18 “Revenue”, according to which revenue should be measured at the fair value of the consideration received or expected to be received. So, if the consideration is money, then receivables are the current value of money, and not the value of the goods sent to the buyer, as we may have thought. Indeed, if the product no longer belongs to the selling company, since it is listed on the balance sheet of the company that acquired it (and is valued in accordance with its accounting policies), then what does the seller care about its value now: the seller is now only interested in the value of the money received for it , – isn’t it?
Accounts receivable means payment deferred in time, that is, a loan. In turn, a loan is nothing more than a financial investment by the lender, that is, an investment designed for investment income. Therefore, in relation to accounts receivable, the business world is traditionally guided by a simple rule: if payment is due tomorrow, then the creditor has the right to expect tomorrow’s money. The calculation of future cash flows for any possible payment date is carried out using the compound interest method, which, in turn, becomes the basis for applying the discounted cash flow method - a method necessary to determine the amount of discounts provided to customers subject to early payment.
Discounting cash flows: why is it done?
The discounted cash flow method, like the compound interest method, is a valuation method that takes into account the change in the value of money over time. And the reason for these changes is not even inflation. Money changes value even at zero inflation, if we take into account future income from investment, taking into account lost profits. In addition, discounting cash flows is also appropriate where there is reason to doubt the fairness of the valuation of financial assets for which cash consideration is deferred in time.
They talk a lot and with knowledge about what interest rate to take into account. For example, that when choosing a discount rate, a company should be guided by market conditions and its own needs, based in each individual case on a specific business situation, taking into account risk assessment and focusing on credit ratings, etc., etc. that this is entirely within the competence of the company's management. Nothing of the kind! Practice shows something else: if you are a public company and your financial statements must be confirmed by an audit report, then you cannot dream of any independence. Auditors of large auditing companies usually have information about rates calculated based on “world experience” and, as they say, “for all occasions,” and then, even if you are right a thousand times, they will never agree with your “subjective” assessments and your reports will not be signed until everything is recalculated at the “correct” rates. Therefore, advice: don’t bother yourself with searching, it’s better to call the auditor right away and let him tell you what rate, in his “objective” opinion, should be applied in your case.
It would seem that this concerns some complex cases that are not related to accounts receivable [for goods shipped, work performed, services rendered]. After all, usually the selling company and the buyer reach an agreement on interest for deferring payment for a predetermined period. However, the question is: what rate should we negotiate with him? After all, consent to purchase is not given at any price, even when there is something to pay.
But nowadays sellers act differently. The question is not about the interest rate for the deferment, but about the amount that the seller wants to receive after a certain period of time. Thus, it turns out that the seller does not charge interest for deferred payment, but provides a discount to those who pay today and now. And if not now, then ahead of schedule, i.e. on any date before the expiration of the deferment agreement. This is the method we are talking about when we hear about discounted cash flows in relation to income recognized simultaneously with the corresponding receivables.
Here, by the way, it would be useful to remind you that a discount is a discount. Discounting is an expectation of reduction, and not vice versa. When it’s the other way around, this is the calculation of compound interest, which is used precisely in cases similar to the one mentioned above, for example:
- when calculating interest on a loan (loan interest), when, according to the terms of the credit/loan agreement, the debtor must not repay either interest or the principal amount of the debt throughout the entire loan period - everything is repaid at the end of the loan period, and
- when calculating interest for deferred payment under the same repayment conditions (see paragraph a), when interest is not included in the price of the goods in advance.
Note. Although in practice, in this case (b), nothing prevents the use of compound interest, and it is indeed used more often than simple interest.
The future value of cash flows is calculated using the compound interest method. In this way, the price of the product and the optimal loan term are determined.
As for the simple interest method, it is used, for example, when calculating interest on a loan (loan interest), when, under the terms of the credit/loan agreement, the borrower undertakes to repay the interest debt each time the next period passes, and the principal amount of the debt is repaid at the end lending period.
Compound interest method
Compound interest method is a method of determining the future value of an investment. Unlike simple interest, which is applied to the same (principal) amount throughout the entire lending period, compound interest is calculated on both the principal amount and the amount of interest for each previous year, and so on throughout the entire lending period.
Example 2.
- Simple interest on a loan in the amount of 100.0 thousand rubles. issued for a period of 3 years at 10% per annum:
- 100.0 x 10% x 3 = 30.0 thousand rubles. in three years
- Compound interest when issuing the same loan on the same terms obliges the debtor to make interest payments in the following amounts:
- For the first year: 100.0 x 0.1 = 10.0 thousand rubles.
- For Year II: (100.0 + 10.0) x 0.1 = 11.0 thousand rubles.
- For the third year: (100.0 + 10.0 + 11.0) x 0.1 = 12.1 thousand rubles.
- Total interest payments: 33.1 thousand rubles.
- The total loan payment will be 133.1 thousand rubles.
- Briefly, this calculation of compound interest can be written as follows:
- 100.0 x 1.1³ = 133.1 thousand rubles.
Thus, using the compound interest method, the future value of funds invested now is calculated.
The future value of an investment after n years is equal to the product of the invested amount by the nth power of the annual interest rate added to one.
Discounting method
Discounting method is a method of determining the current value of an investment and is the inverse of compound interest. Accordingly, the current value of an investment is its discounted value, or, as is commonly said, the discounted value of future cash flow.
You can say it differently. The discounting method is a calculation that allows you to answer the question of what amount must be invested today in order to receive in n number of years the amount that the investor has previously determined for himself as a goal.
Example 3. In the previous example, the future value of the investment is 100.0 thousand rubles. was determined by the calculation: 100.0 x 1.1³ = 133.1 The result means the following: if we want to invest 100.0 at 10% per annum, then in three years we can count on receiving 133.1 thousand rubles. But, if the inverse problem is posed: knowing the future value, determine the current one, then the calculation will take the following form: 133.1 / 1.1³ = 133.1 / 1.331 = 100.0 The result means the following: if we want to get 133 in three years, 1 thousand rubles, then you should invest 100.0 thousand rubles today.
Thus, using the discounting method, the current value of cash flows that the investor expects in the future is calculated.
The current value of an investment calculated for n years is equal to the quotient of its future value divided by the nth power of the annual interest rate added to one.
Next: Discounted cash flow accounting (with examples).Full text of the article "RECEIVABLES: DISCOUNTING CASH FLOW"read in the magazine of the publishing house AYUDAR PRESS" Current issues of accounting and taxation", 2011, No. 3, section "Professional judgment".
Economic Sciences/ 7. Accounting and AuditingAssociate Professor Adrysheva S.Zh.
East Kazakhstan State
Technical University named after D. Serikbayev, Kazakhstan
DISCOUNTING RECEIVABLES
Accounts receivable(from Latin debitum – debt, obligation) - the amount of debts owed to a company from legal entities or individuals as a result of economic relations with it. Typically, debts arise from sales on credit. In accounting, accounts receivable are understood as property rights, which are one of the objects of civil rights.
Upon initial recognition, receivables are measured at fair value (transaction value), including transaction costs that are directly attributable to the acquisition or issue of a financial asset (clause 44 of IFRS ( IAS ) 39).
P When calculating the effective interest rate, an entity is required to determine cash flows taking into account all contractual terms of the financial instrument (for example, prepayment, call options and similar options), but may not take into account future credit losses. The calculation takes into account all fees and other amounts paid or received between the parties that are an integral part of the effective interest rate, as well as transaction costs and all other premiums or discounts. It is assumed that the cash flows and settlement lives of a group of similar financial instruments can be estimated reliably. However, in those rare cases where it is not possible to estimate the cash flows or expected life of a financial instrument (or group of financial instruments), an entity is required to use the contractual cash flows over the entire contractual life of the financial instrument (or group of financial instruments).
Bringing the future value of funds to the present is commonly called discounting. The economic meaning of the process of discounting cash flows is to find a present value equivalent to the future value of cash.
Accounting uses the accrual principle, which involves recognizing income and expenses regardless of cash flow. The flip side of recognizing income and expenses that do not have cash flows is recognizing claims and liabilities. Those that require repayment after a significant period of time are cheaper than their face value exactly as much as the present value of money is more expensive than its future value at the time the debt is repaid. Therefore, to evaluate such assets and liabilities, it is logical to use discounting, that is, a discount relative to par in accordance with the effective interest rate.
Debt involving a one-time cash payment is discounted using the formula:
PV n= FV n 1/ (1 + i)
Where:
PV n n,
F.V. n – n,
i – discount rate,
n – number of periods.
If regular equal payments are expected over a specified period of time (annuities), the present value of the asset or liability generating such payments is determined by the formula:
m n
PV n= å FV n 1/ (1 +i)
n =1
Where:
PV n - the current value of an asset or liability during the period n,
F.V. n – the future value of an asset or liability (or cash flows from using the asset or liability) in a period n,
i – discount rate,
n– number of periods.
The discount rate is the minimum amount of return on investment at which an investor would prefer participation in a project to an alternative investment of funds with comparable risk. The discount rate is used to find the present value of future cash flows.
Estimating the discount rate involves assessing the time value of money and the risks specific to the asset.
For calculations it is possible to use:
· the weighted average cost of borrowed capital, that is, the weighted average rate on loans received by the company;
· expected lending rate;
market lending rate.
To select an option for calculating the discount rate, various approaches can be used, in particular the method according to which the discount rate is determined by several components: the risk-free rate (sometimes the level of yield on government securities is used as such) and an adjustment for the risk associated with the investment project.
Discounting receivables makes it more adequate to structure income by type and distribute it by period. When making transactions between independent entities, a deferred payment will certainly affect the contract price, which will increase in accordance with the current interest rate. This increase in its economic essence cannot be considered part of the proceeds from the sale of products. It represents interest income that must be recognized over the entire deferral period. Recognition of revenue in a nominal amount with significant deferrals of payments (above the usual level) misinforms the user regarding the structure of the organization's income and their distribution by period, and also complicates the financial analysis of statements.
In addition, discounting receivables is a prevention of accounting problems in cases of their sale before maturity. No financial agent (if we are talking about unrelated parties) will buy receivables at par. The transaction always occurs below par with a discount, and the accountant is faced with the question of the correct qualification of this discount.
If the receivables were initially recognized at a nominal amount, then at the time of their sale the discount will reduce the financial result. It turns out that the company overestimated its profit in the period in which the products were sold, and underestimated it when the receivables were sold. Among the profit and loss statements of Kazakh companies, you can also find those in which the entire nominal amount of the sold receivables is recognized as an expense while recognizing income in the full amount for which the debt was sold. If we were talking about a financial agent trading “receivables” along with other financial instruments, such a reflection would be of interest to the user. But in the reporting of a non-financial organization that sold its classic “receivables,” the reflection of such values clogs the profit and loss account.
If, upon initial recognition, the receivables were discounted, then there will be no problems with their subsequent sale, since the balance sheet value of the debt approximately coincides with its selling price. The discrepancy can only be due to an error in determining the interest rate. But it is unlikely to go beyond the limits of materiality. On the income statement, the difference between the book value of the debt and its selling price will be included in other operating income and expenses (the difference only, not the gross amounts).
Discounting receivables makes it more adequate to structure income by type and distribute it by period.
Literature
1 Law of the Republic of Kazakhstan “On Accounting and Financial Reporting” (with amendments and additions as of 01/06/2011)
2 Law of the Republic of Kazakhstan dated May 2, 1995 No. 2255 “On Business Partnerships” (with amendments and additions as of 07/05/08)
3 Law of the Republic of Kazakhstan dated November 20, 1998 No. 304-I “On auditing activities” (as amended and supplemented as of March 1, 2011)
4 Kaverina O.D. Management accounting: systems, methods, procedure. – M.: Finance and Statistics, 2003. 340 pp.
5 Code of the Republic of Kazakhstan “On taxes and other obligatory payments to the budget” (Tax Code) (With amendments and additions as of 01/01/2011)
6 Nurseitov E.O. "Accounting in organizations." Study guide. Second edition and revised. – Almaty 2007. – 476 p.
Successful accounting in many organizations depends to a certain extent on the qualifications of the chief accountant and other accounting employees.
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An important aspect is the ability to apply Russian and international accounting standards. One of the international methods of maintaining accounting policies is the IFRS method.
IFRS classification
In Russia there is not yet a single standard regulating the procedure for accounting for accounts receivable. To some extent, it makes sense to use foreign standards, one of which is IFRS.
Properly organized interaction with counterparties is the basis for any company engaged in the supply of goods or provision of services. It is no secret that the basis of successful work is in personnel.
Some entities already have IFRS specialists whose task is to account for the fair value approach for the purpose of reliably measuring debts due from third parties.
The organization is obliged to take into account debt as of the end of the reporting period. The international standard classifies the debts of counterparties depending on their expected repayment periods:
Accounting for accounts receivable according to IFRS
The valuation of receivables is carried out on the basis of the IFRS 39 standard. Upon initial recognition, a receivable, like any other economic asset, should be analyzed at fair value. However, in Russian accounting, short-term receivables are taken into account at the price of the business operation for which the debt arose.
IFRS provides for an inventory of debt. Inventory according to IFRS is a procedure for detecting overdue receivables in order to work with doubtful obligations, as well as measures to confirm balance sheet data as of a certain date.
For the purposes of IFRS, it would be advisable to adopt the experience of accounting for receivables in Russia, such as a documentary reflection of inventory. But it is better to leave the documentation of business transactions in accordance with Russian standards.
Accounting for receivables according to IFRS includes two stages of assessment:
- original;
- subsequent.
Both trade and sales obligations and other types of obligations are subject to assessment. Initially, the debt is reflected at its actual cost, that is, in the amount in which it is expected to be received (including VAT).
When the effect of the time value of money is strong enough, the organization needs to record long-term receivables taking into account depreciation.
Long-term receivables may arise from the sale of assets with deferred payment.
In this case, the profit from the sale of an asset is defined as the actual amount of funds that could have been received from the counterparty on the day of sale (that is, the current price if money is paid immediately for the good or service).
During the initial valuation process, debt discounting is carried out. Subsequent valuations are monthly recalculations of the value of receivables, the results of which reflect the amortization of the discount as part of financial income.
Discounting
When making an initial valuation, you need to take into account a concept called a discount, which is the difference between the actual price (what it would be if cash was immediately received for the asset) and the price of future expected cash flows.
The discount is treated as interest income and is amortized to the statement of income over the period until the funds are received.
In the same case, if the price for a product or service (asset) is unknown for some reason, the market interest rate is used to discount the receivable.
The rate is determined based on:
- the interest rate that applies to bank loans with similar provision parameters - term, currency, amount, which are issued to the debtor organization during the period of availability of receivables;
- or the weighted average interest rate according to the statistical information of the Central Bank of Russia, which was in effect on the date of recognition of the receivable, for loans that were issued to commercial organizations with similar terms and conditions.
Important! Long-term input VAT is not a financial instrument! No discounting procedure is carried out in relation to it.
Let's look at the process of discounting receivables using an example.
Organization 1, engaged in the sale of automotive equipment, sold 2 units of transport to institutions 2 and 3 on January 10, 2019.
According to the terms of the agreement, company 2 had to make payment for the supply immediately, and company 3 - after a year. The cost of equipment for companies 2 and 3 is the same - 300,000 rubles.
Solution. We estimate the discount rate. Company 3 actually received a commercial loan.
Financial and economic instruments of organization 1 are not valued on stock exchanges, so it is not possible to reliably determine the effective interest rate.
Let's estimate the rate using the difference between the actual sale price of the car and the price under the deferred payment agreement. But since the price for both buyers is the same, assume that the sale to firm 3 was made at a reduced price.
In this case, interest rates on bank loans with similar conditions are used (ruble loan, repayment period - 1 year, without collateral). Let’s say the rate on such loans is approximately 10%.
Then the reliable value of the proceeds from the sale of equipment to the 3rd company will be 272,700 rubles (300 thousand were discounted at a rate of 10%).
Accounting for transactions:
The difference - 27,300 rubles - is interest on the use of the loan, reflected in the following posting:
Impairment of accounts receivable
In order to partially compensate for written-off receivables, the company creates a special reserve fund. The reserve funds are used to repay part of the receivables that were recognized as bad.
For the purpose of creating a reserve fund, the organization ranks the debt depending on its duration:
- up to 3 months;
- from 3 to 6 months;
- from 6 to 12 months;
- more than 12 months
Typically, the following probability ratios are established that the debt will not be repaid:
The loss a company incurs as a result of debt impairment is calculated by using an estimated percentage of default risk to the carrying amount of the receivable.
Thus, a receivable with a maturity of 3 months or less does not incur any losses.
Write-off
If the debt is recognized as unrecoverable on the grounds provided for (expiration of the statute of limitations, liquidation of the debtor, etc.), it is written off in full from the previously created reserve fund for doubtful obligations.
