Equity Disclosure
Dear Eli,
Retrospect to the ongoing concern in the accounting department over the additional disclosure of notes issued to the family members of Mr. Sigar on the financial statements of the company, I am writing this memo to illustrate the possible solution under the light of Alternative 2 allowed by FASB as part of which we can classify notes as a reduction in the equity amount.
Please refer to the provisions of ASC 505-10-45, which states that it is possible that an entity may receive a note instead of cash as a contribution to its equity. In such situation, the classification of note receivable is not appropriate as an asset unless there is a substantial evidence that the borrower have the ability to pay and will pay the due amount within a short period of time. Therefore, under any other circumstances,the notes receivable should be classified under the equity section as deduction to the equity either in the form of receivable within equity or as a distribution to shareholders). However, ASC also extends an exception here that if the entity receives the due amount before the issuance of the equity, the note may still be reported as an asset.
Henceforth, considering the current scenario in our company where several of the notes receivable are in the name of shareholders of the company, it is only legitimate to classify them under the equity section as a deduction. It is also considerable that even though the shareholders have shown the historical capability to pay their dues on time, however, since the amount is not expected to be paid in a short period of time, we cannot classify the notes as receivables unless we receive them before the preparation of the next financial statements.
I hope my research and discussion on the relevant standard related to appropriate disclosure of notes receivable from the shareholders will help you take up the matter more meticulously.
Regards,
Works cited
FASB. 505: Equity . n.d. 7 March 2015 <https://law.resource.org/pub/us/code/bean/fasb.html/fasb.505.2011.html>.
