The loss on receivables should reflect expected credit losses expected to be incurred over the entire time that the receivable is expected to be outstanding. In other words, any risk of loss should be considered, even if the company is exposed to losses on the receivable only in the latter part of the receivables' life.
The CECL model requires companies to analyze available information that is relevant in estimating the collections on receivables as long as the information is reasonably available with additional costs and efforts that do not exceed the benefits to the financial statement users. Information can include internal and external information to the company, qualitative and quantitative information, information related to a specific customer, or to the broader environment. Companies should consider past events such as incurred losses on collections but should also consider current conditions and forecasted information, such as changes in economic conditions that affect collections (a future event that could affect a major customer's ability to make payments on account that would indicate collectibility issues, even if they've paid in the past). Start by looking at historical trends, but the standards require companies to adjust the historical information to reflect current information and reasonable and supportable forecasts of the future.
Items to consider in updating historical info for current conditions: customer's financial condition, credit rating, credit score; customers ability to make payments; nature and volume of receivables; volume and severity of past due amounts; entity's credit policies and procedures; quality of the company's credit review system; experience, ability, and depth of management; and environmental factors including market conditions
Receivables with similar risk are pooled together when estimating collectibility of accounts. If a receivable does not share the risk of a pool, it should be evaluated separately. One way to pool receivables is based upon past due dates. An aging of AR schedule categorizes the individual receivables by age or the extent to which the accounts are past due. The ADA is estimated by taking each age category and multiplying by an expected credit loss rate for that category. The reasoning behind this method is that the older accounts are less likely to be collected, thus a higher loss rate is applied to older accounts.
Other ways that receivables could be pooled are by credit ratings or industry
The accounting standards require the estimate of a credit loss to reflect risk of loss, even if remote. There would not be an accrual recorded for an ADA when historical experience adjusted for current conditions and reasonable and supportable forecasts provides an expectation that nonpayment of the receivable balance is zero. If nonpayment is even remote, an allowance is required. It would be challenging for a company to establish a zero-loss expectation for a receivable; thus, a situation where no allowance is recorded would be rare.
t or f: For discounting, he bank charges interest on the maturity value a full 8 months before that value is reached, effectively raising the interest cost to Wyoming. Wyoming records the following entries to discount the note. First, Wyoming accrued interest revenue through the date of the discounting. Next, Wyoming records the discounting of the note. To accrue interest revenue on august 1st, interest receivable is debited and interest revenue is credited. To record discounting of the note, debit cash and loss on sale of note receivable, while crediting note receivable and interest receivable. After august 1, the note is no longer an asset of Wyoming and is removed from its books. Two factors contribute to the loss: the note was transferred relatively early in its term, and the bank charged a higher interest rate. If the note had been held longer before it was discounted, the total interest charged by the bank would have been reduced, thus increasing the proceeds.