Criteria for Classification of Accounts Receivable

In this article, we will try to understand the criteria for classifying accounts receivable for goods (works, services) into current and non-current according to the requirements of Ukrainian National Accounting Standards (NAS). I am confident that virtually all accountants, upon reading this article, will immediately think: "What is there to understand? After all, it has long been known to everyone that debt with an expected repayment period of 12 months is current, and all other debt is non-current." Admit it, we all tend to proceed from this when preparing financial statements and/or auditing them. However, in reality, the norms of the current NAS are far from being so unambiguous. Surprised? Let's see what NAS 10 "Accounts Receivable" tells us about this.

According to paragraph 4 of this NAS, current accounts receivable is "the amount of accounts receivable that arises in the course of the normal operating cycle or will be repaid within twelve months from the balance sheet date," whereas non-current accounts receivable is "the amount of accounts receivable that does not arise in the course of the normal operating cycle and will be repaid after twelve months from the balance sheet date." At first glance – nothing new, however, let's pay attention to two inconspicuous conjunctions in these definitions: "or" and "and." Their presence tells us the following: for accounts receivable to be recognized as non-current, two conditions must be met simultaneously, whereas for debt to be recognized as current, it is sufficient for at least one of the conditions to be met. Given this, we arrive at a paradoxical conclusion: according to paragraph 4 of NAS 10, accounts receivable that arises in the course of the normal operating cycle must be classified in accounting as current regardless of its repayment terms (within 12 months from the balance sheet date or after this period). The wording "... arises in the course of the normal operating cycle," in our opinion, is intended to guide the reader as to which specific operations gave rise to a particular accounts receivable – from operations carried out by the enterprise "in the course of the normal operating cycle," or outside of it. That is, this wording in no way defines the timeframes for the origination and/or repayment of such debt (the timeframes are clearly indicated in the second parts of the definitions of current and non-current debt – after the same conjunctions "or" and "and"). The current legislation does not contain a definition of the concept of a "normal operating cycle" (unlike "operating cycle," the definition of which is provided in paragraph 3 of NAS 1 "General Requirements for Financial Reporting"). In our opinion, the phrase "... in the course of the normal operating cycle" means "... within the framework of ordinary (typical for the enterprise) business activities." Of course, one can debate the possible interpretations of the meaning and understanding of this phrase, but what cannot be debated is that this phrase has no relation to defining the timeframes for the repayment of any particular debt.

The question arises: what should be done with such a paradoxical conclusion (how to reflect such accounts receivable in financial statements)? After all, despite all its paradoxical nature, it is difficult to disagree that it absolutely complies with the "letter of the law" (the requirements of NAS 10). In our opinion, in this situation, an accountant/auditor can be guided by the norms of the aforementioned NAS 1. Thus, in the enterprise's Balance Sheet, non-current accounts receivable should be reflected as part of non-current assets, and current accounts receivable – as part of current assets. According to paragraph 3 of this NAS, current assets are "cash and cash equivalents that are not restricted in use, as well as other assets intended for realization or use within the operating cycle or within twelve months from the balance sheet date" – that is, unlike NAS 10, clear timeframes are used in the definition of current assets: "...within the operating cycle or within 12 months...". Thus, accounts receivable that will be repaid within 12 months from the balance sheet date (cases where the operating cycle is longer than 12 months will be deliberately ignored in this article), according to NAS 1, must be classified as current assets regardless of whether it arose "in the course of the normal operating cycle" or not. Accordingly, debt that does not meet these criteria is reflected in the Balance Sheet as part of non-current assets.

Director of Audit Services
Certified Auditor
Viktor Safinskyi