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Question
1- Write a note on Accounting GAAP and IFRS writing for Blue Ribbon Corporation in approx 750 words with references to APA.
Answer
Introduction:
In this report, an attempt is made to discuss the treatment of transferring the accounts receivable to a different collection agency. Factoring is a procedure of selling the company’s invoices or receivables to a third-party financial institution called as the “factor”. The “factor” then collects the payments from the specified customers and demands for a fee or a percentage from the amount owed. Most of the debt collection companies works as the agents of the creditors. The utmost priority of these third-party companies is to maintain a healthy amount of cash reserve within the firm to meet its day to day operational and financial activities (comcapfactoring, 2019).
Functioning of Third-Party Companies:
A company adopts factoring if the total cost of collection of debts doesn’t exceeds the commission payable. The fundamental idea is to reduce costs and maximize resources by a methodical debt management process recognizing all the possible expenditure and threats. In this process only the right of collection is transferred to the competent authorities and the cost of operation is to be carried by the commissioning agents. A fix percentage of bad debts is to be ascertained by the commissioning company regardless of the debtor’s assets. The idea behind with recourse factoring is that the business has to refund the factor if business incurs a loss i.e.; that the account receivables cannot be collected from the customers. Moreover, without recourse factoring evolves that the business doesn’t have to refund any amount to the factor if there is a failure in collection of risk.
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Recognition as an Asset:
Receivables are amounted bills by the company to its customers.Receivables are current assets of a company, which ensures a quick payment. They are considered as liquid assets as they are used as collateral to secure a loan to meet the short term obligations. Receivables are a part of the working capital and requires a quick payment to ensure a healthy cash reserve to follow up with the daily expenditure of the company.They are called as assets because they are bills resulting to payment in the days to come. As the debt collection companies are sharing the risk and the collection rights of the amount due this might result in an increased financial stability in both ends (Debt collection is an asset how, 2019).
Treatment of Factoring Transactions:
As factoring evolves a sale of invoices and therefore is recorded as a gain or loss recognised on the receivable transferred to the factor. The journal entries for both therespective cases are similar. It just that there is a difference is the concepts adopted by them.
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Place Your OrderTreatment in GAAP (US):
According to the aforesaid standards of Generally Accepted Accounting Principles (GAAP) the treatment includes: The interest to be incurred is to be debited in the books of accounts. The amount collected should be less than the amount of the asset, resulting in debiting the commission payable account in the books of entry. The expenses are to be matched with the revenues as per GAAP standards (Accounting treatment for sale of receivables under gaap, 2019). As per GAAP (US) there exists the matching concept. The estimation of expenses takes place when the product actually contributes in the revenue making process. This process evolves systematic allocation of costs in their respective accounting periods. If no links with the revenue is established the costs are to charge under different expenditure headings in the current period. The process evolves in the greater assessment of profitability and operations (GAAP, 2019).
Treatment in IFRS:
An unconditional sale of receivables would result in de recognition because all the risk and rewards are already transferred. Under factoring arrangement the basis of control is passed to the factor who is responsible in maintaining the sales ledger. Under the invoice discounting the business continues to receive customer payments and manage its credit control activities. As per IFRS the expenses should be recognized in the same period as the revenue. If this doesn’t occurs then the expenses might predate the period in which the related amount of revenue is realized. In this particular case the commission is paid for the collection of debts from the customers so it is realized as an expenses which is to be debited in the books of entry. In the process of factoringnearly 80% of the total owed amount is remitted to the seller company after deducting the fee and the interest payable therefore the commission is not paid separately. So the retained sum is considered as the commission (Difference between gaap and ifrs in terms of recording factoring transactions, 2019).
Conclusion:
During the financial research in this particular topic it has been found that the only difference between these two principles is the identification and ascertainment of expenses with respect to the revenue making process (Difference between gaap and ifrs in terms of recording factoring transactions, 2019).
References:
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Accounting treatment for sale of receivables under gaap - (2019). Retrieved from https://www.google.com/search?q=accounting+treatment+for+sale+of+receivables+under+gaap&rlz=1C1CHBF_enIN830IN830&ei=oxYzXPOeHdbbrQH3p67wBg&start=10&sa=N&ved=0ahUKEwiz_L_hqNvfAhXWbSsKHfeTC24Q8tMDCK8B&biw=1366&bih=657
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comcapfactoring.com (2019). Retrieved from https://www.comcapfactoring.com/blog/why-do-companies-sell-their-accounts-receivable/
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Debt collection is an asset how (2019). Retrieved from https://www.google.com/search?rlz=1C1CHBF_enIN830IN830&ei=KxIzXOnWFY6o9QOMkrjABA&q=debt+collection+is+an+asset+how+&oq=debt+collection+is+an+asset+how+&gs_l=psy-ab.3..33i22i29i30.24258.36155..36493...1.0..0.453.9502.0j7j23j7j1......0....1..gws-wiz.....6..0j0i71j35i304i39j35i39j0i131j0i67j0i20i263j0i22i30.2YTgtj0K7C4
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Difference between gaap and ifrs in terms of recording factoring transactions (2019). Retrieved from https://www.google.com/search?q=difference+between+gaap+and+ifrs+in+terms+of+recording+factoring+transactions&rlz=1C1CHBF_enIN830IN830&oq=difference+between+gaap+and+ifrs+in+terms+of+recording+factoring+transactions&aqs=chrome..69i57.27178j0j7&sourceid=chrome&ie=UTF-8
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Generally Accepted Accounting Principles - GAAP. (2019). Retrieved from https://www.investopedia.com/terms/g/gaap.asp
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