Professional Documents
Culture Documents
Receivable financing refers to techniques of accelerating its cash inflow through the use
of receivables.
Notification basis
Customers are notified of the assignment.
Customers pay to the assignee.
Assignee lends only a certain percentage of the face value of the
receivables. The percentage depends on the quality of the receivables.
Assignee charges interest for the loan and service or financing charge for
the assignment arrangement.
1
The assigned accounts are segregated from other accounts.
The equity of the assignor in the assigned accounts should be disclosed
parenthetically or through a note.
On a continuing agreement
Involves a continuing arrangement where a financing company
purchases all of the accounts receivable of a company.
Factor charges commission or factoring fee.
Factor may withhold a predetermined amount as a protection
against customer returns and allowances. This is called factors
holdback.
2
Sale of receivables with recourse means that a purchaser (bank or finance
company) advances cash in return for receivables but retains the right to collect
from the seller if debtors (sellers customers) fail to make payments when due.
FASB No. 140, the seller is required to estimate the value of the recourse
obligation and recognize that liability. That is the seller must estimate the
amount that will be paid to the purchaser as a result of default on the receivables
that were sold.
Example
A firm raises funds by selling P5,000 of its receivables for P4,300. The receivables
have a net realizable value of P4,700. The receivables are sold with recourse and the
seller estimates (as required by SFAS No. 140) that the recourse obligation has a fair
value of P250. The finance company witheld 5% of the purchase price as protection
against sales returns and allowances.
Cash 4,085.00
Receivable from factor 215.00
Allowance for bad debts 300.00
Loss on sale of receivables 650.00
Accounts receivable 5,000.00
Recourse obligation 250.00
Pro-forma Entries
Pledge of Cash xxx
accounts Notes payable Xxx
receivable
3
Adjusting entry, if Interest expense xxx
payment is to be Interest payable xxx
made beyond the
accounting period
Cash xxx
Sales discount xxx
Accounts receivable assigned xxx
4
Loss on factoring xxx
Accounts receivable xxx
Cash xxx
Loss on sale of notes receivable xxx
Notes receivable xxx
Interest receivable xxx
5
Loss on Factoring Other Expense
Loss on Sale of Notes Receivable Other Expense
Two kinds
1. Interest bearing
2. Non-interest bearing
Imputed interest rate (From Keiso, Fargher, Wise, Weygandt and Warfield, 2008)
1. Rate used to determine the present value of the note, if the fair value of the
property, goods, services or other rights is not determinable, and if the note has
no ready market.
2. Determined by the process of interest rate approximation called imputation.
3. The choice of a rate is affected by the prevailing rates for similar instruments of
issuers with similar credit ratings.
4. Choice of rate is also affected specifically by restrictive covenants, collateral
arrangements, payments schedules, existing prime (or base) interest rate, etc.
Pro-forma Entries
Receipt of note
Discount Notes receivable xxx
Asset/Income xxx
Discount on notes receivable xxx
6
Amortization of Discount on notes receivable xxx
Discount Interest income xxx