Equity Disclosure
Dear Eli,
In reference to our discussion over the possible classification of notes held by our company in retrospective to the cash advanced to our shareholders, I have cited the FASB Codification literature and would like to propose the explanation over the possible classification of such notes under the equity section according to ASC 505-10-45.
According to the provisions of ASC 505-10-45, an entity may hold notes in receivable in lieu of the cash advanced to its shareholders. Henceforth, in such situation, the entity should not classify the notes receivables on the asset side of the balance sheet unless there is a legitimate proof that the respective shareholder is capable of paying the amount due and the amount will be paid within a short period of time. FASB proposes to classify such notes as a deduction in the equity section either in the form of receivable within equity or as a distribution to shareholders. However, adding an exception to the rule, FASB states that if any entity receives the amount due on notes receivables before the issuance of the yearly financial statements, then the notes can still be classified as an asset.
Therefore, considering the current situation where our company owns receivables from the shareholders, it is appropriate that we classify the notes receivable as a deduction from the equity section. I am suggesting this proposal even though the shareholders have a credible payment history because we are not expecting any short-term payment from our shareholders.
I hope my research work and the related discussion on the accounting standard ASC 505-10-45 will assist you in taking final decision relating to the disclosure of notes receivables.
Regards,
References
FASB. 505: Equity . n.d. 8 March 2015 <https://law.resource.org/pub/us/code/bean/fasb.html/fasb.505.2011.html>.
