Interest on receivables and payables;

              INTEREST ON RECEIVABLES AND PAYABLES
by Rudolph C. Greipel Principal, Executive Office
Adapted from a presentation by Armin C. Tufer, Partner, Execu­tive
Office, before the American Management Association, New York City-April 1971
On January 22, 1971 the Accounting Principles Board issued, for comment from interested parties, an exposure draft of a proposed Opinion relating to interest on receivables and payables. The proposed Opinion1 applies to all receivables and payables representing contractual rights to receive or obligations to pay money on fixed or determinable dates in the future, whether or not there are any stated provisions for interest. For convenience, such receivables and payables are collectively referred to herein as "notes." Examples are secured and unsecured notes, debentures, bonds, mortgages, equipment obligations and some accounts receivable and payable. The proposed Opinion is not intended to apply to receivables and payables due within normal trade terms not exceeding one year, nor does it change the accounting for convertible debt securities described in APB Opinion No. 14.2
1 The original presentation, which dealt with the exposure draft of the proposed APB
Opinion on Interest on Receivables and Payables, has been revised herein to include
changes made in the Opinion as finally adopted in August 1971 by the Accounting
Principles Board. The Opinion is effective for transactions entered into on or after
October 1, 1971.
2 The Opinion is also not intended to apply to:
1. "amounts which do not require repayment in the future, but rather will be applied
to the purchase price of the property, goods, or service involved (e.g., deposits or pro­gress
payments on construction contracts, . . .);
2. "amounts intended to provide security for one party to an agreement (e.g., security
deposits, retainages on contracts);
3. "the customary cash lending activities and demand or savings deposit activities of
financial institutions whose primary business is lending money;
4. "transactions where interest rates are affected by the tax attributes or legal re­strictions
prescribed by a governmental agency (e.g. industrial revenue bonds, . . .);
5. "transactions between parent and subsidiary companies and between subsidiaries
of a common parent" (consideration deferred pending study of the subject of report­ing
on components of a business enterprise, which is in process).
In addition, the Opinion is not intended to apply to, nor is a position taken with re­spect
to, "the application of the present value measurement technique to estimates
of contractual or other obligations assumed in connection with sales of property,
goods, or service, for example, a warranty for product performance."