6.3: Receivables

Receivables are asset accounts applicable to all amounts owing, unsettled transactions, or other monetary obligations owed to a company by its credit customers or debtors. These are contractual rights that have future benefits such as future cash flows to the company. These accounts can be classified as either a current asset, if the company expects them to be realized within one year or as a long-term asset, if longer than one year.

Typical receivable-related categories include:

• Accounts (trade) receivable—amounts owed by customers for goods or services sold by a company on credit in the normal course of business. The transaction document is typically called an invoice.
• Notes receivable—more formal, unconditional written promises to pay a specified amount of money on a specified future date or on demand. The transaction document is usually referred to as a promissory note.
• Non-trade receivable—arise from any number of other sources such as income tax refunds, GST/HST taxes receivable, amounts due from the sale of assets, insurance claims, advances to employees, amounts due from officers, and dividends receivable. These are generally classified and reported as separate items in the balance sheet or in a note that is cross-referenced to the balance sheet statement.

The illustration below shows a portion of the balance sheet for cash and cash equivalents and various receivables on the financial statements:

Consolidated Balance Sheet
As of December 31, 2020 and 2019
(In millions of dollars except share amounts)

		2020			2019
ASSETS
Cash and cash equivalents			3,500			4,200
Marketable securities			1,500			1,400
Receivables from affiliates			30			60
Trade accounts and notes receivables (net)			3,800			3,800
Financing receivables (net)			25,500			22,200
Financing receivables, securitized (net)			4,200			3,200
Other receivables			1,000			1,500
Operating leases receivables (net)			3,000			2,500

Receivables Management

It is important to consider carefully how to manage and control accounts receivable balances. If credit policies are too restrictive, potential sales could be lost to competitors. If credit policies are too flexible, more sales to higher risk customers may occur, resulting in more uncollectible accounts. The bottom line is that receivables management is about finding the right level of receivables to maintain when implementing the company's credit policies.

As part of a credit assessment process, companies will initially assess the individual creditworthiness of new customers and grant them a credit limit consistent with the level of assessed credit risk. After the initial assessment, a customer's payment history will affect whether their credit limit will change or be revoked.

To lessen the risk of uncollectible accounts and improve cash flows, some companies will adopt a policy that offers:

• Cash discounts to encourage cash sales
• Sales discounts to encourage faster payments of amounts owing on credit
• Late payment interest charges for any overdue accounts

Other management strategies can be implemented to shorten the receivables to cash cycle. In addition to the discounts or late payment fees listed above, small- and medium-sized companies may decide to sell their accounts receivable to financial intermediaries (factors). This will convert the receivables into cash more quickly than if they waited for customers to pay. Larger companies may rely on another way of selling receivables, called securitization. This will be discussed later in this chapter.

Receivables management involves developing sound business practices for overall monitoring as well as early detection of potential uncollectible accounts. Key activities include:

• Regular analysis of aged accounts receivable
• Regularly scheduled assessments and follow up on overdue accounts

• 6.3.1: Accounts Receivable

• 6.3.2: Notes Receivable

• 6.3.3: Derecognition and Sale of Receivables- Shortening the Credit-to-Cash Cycle

• 6.3.4: Disclosures of Receivables