RECEIVABLE FINANCING
Receivable financing refers to the act of including cash inflows from receivables
other than from their normal or scheduled payment. The following are the common
forms of receivables financing:
a. Pledge
b. Assignment
c. Factoring
d. Discounting
PLEDGE
Under a pledge transaction, receivables are used as collateral security for a loan.
A pledge is treated as secured borrowing because the pledger/borrower retains
control over the pledge receivables. Accordingly, the pledge receivables are not
derecognized, and are also not specifically identified from other receivables. No entry is
made for the pledge receivables; only a note disclosure is necessary. Only the loan
transaction is recorded.
Cash —----------------------------------------------------------------- xxxx
Loan Payable —-------------------------------------------------------- xxxx
ASSIGNMENT
Assignment is a formal form of pledge wherein the receivables used collateral
security for borrowing are specifically identified and stated in the loan contract. Under
pledge, the receivables held out as collateral security are not specifically identified; thus
in case of default, the lender may hold any of the borrower’s receivables. Under
assignment, the lender can only hold as collateral security the specific receivables
assigned.
Assignment is also treated as secured borrowing. However, the assigned
receivables are identified by reclassifying them to the “Receivables-assigned” account
or similar account.
The assigned receivables are presented in the statement of financial position as
regular receivables, i.e., included in “trade and other receivables.” However, the equity
in the assigned receivables is disclosed in the notes Equity in the assigned receivables
is the carrying amount of the assigned receivables minus the carrying amount of the
related loan payable (Asset - Liability = Equity). This is only a note disclosure. The
assigned receivables and the loan payable are presented separately in the statement of
financial position.
FORMS OF ASSIGNMENT
Notification Basis
The assignor/borrower notifies the debtors whose receivables have been
assigned about the assignment. Accordingly, the debtors will remit payments on the
receivables directly to the assignee/lender
Non-notification Basis
The assignor/borrower does not notify the debtors. Accordingly, the debtors will
continue to remit payments to the assignor/borrower. Assignments are more commonly
made on a non-notification basis.
FACTORING
Instead of being collateralized, receivables can also be sold to a financial
institution. This is referred to as factoring. Factoring is usually done on a notification
basis and on either a without recourse or with recourse
Without Recourse
The factor assumes the risk of uncollectibility and absorbs any credit losses. The
transferor is not liable in case the debtor fails to pay
It is an outright sale of receivables, both in form (transfer of title) and substance
(transfer of control). Accordingly, the factored receivables are derecognized in its
entirety.
With Recourse
The transferor guarantees payment to the factor in the event the debtor fails to
pay. The transferor is liable for the guaranteed amount
This is recorded using a financial components approach because of the
transferor’s continuing involvement in the receivable. Values are assigned to such
components as the recourse provision, servicing rights, and agreement to the
repurchase. Each party to the factoring recognizes only the assets and liabilities that it
controls after the transfer
Factor’s Holdback
Whether the factoring is on a without recourse or with recourse basis, the
transferor is responsible for any reduction in the collection of receivables due to sales of
returns and allowances. Thus, the factor usually retains a certain percentage of the
transferred receivables for these items. The transferor records the factor’s retention as
“Factor’s holdback” or “Receivables from factor”. The factor records a
corresponding liability. The factor returns to the transferor any excess “holdback” when
the receivables are fully collected or when there are no further sales returns and
discounts
CASUAL BASIS VS. REGULAR MEANS OF FINANCING
If the factoring is made on a casual basis, the charges are recorded as loss.
However, if the transferor regularly factors receivables as a means of financing, the
charges are recorded as regular expenses
SECURITIZATION
Another form of a transfer of receivable is securitization. It takes a pool of
assets, such as credit cards receivables, mortgage receivables, or car loan receivables,
and sells shares in these pools of interest and principal payments. This, in effect,
creates securities backed by these pools of assets . Virtually every asset with a
payment stream and a long-term payment history is a candidate for securitization.
Securitization is composed with factoring as follows:
Factoring Securitization
Usually involves sale to only one entity, Many investors are involved, margins are
fees are high, the quality of the tight, the receivables are of generally
receivables is low, and the transferor higher quality, and the transferor usually
afterwards does not usually service the continues to service the receivables
receivables
DISCOUNTING OF NOTES RECEIVABLE
Discounting of notes receivable is another form of notes receivable financing
whereby the holder endorses a note to a bank in exchange for the maturity value less a
discount. At maturity date, the bank collects from the maker of the note. Notes may be
discounted on without recourse or with recourse basis
Without Recourse With Recourse
➢ The entity is not liable in case of ➢ The entity is liable in case of the
the maker fails to pay maker fails to pay
➢ The note is sold outright and ➢ The note is not derecognize and
therefore derecognize the discounting is discounted for as
either:
a. Conditional Sale- a
contingent liability equal to
the face amount of the note
is only disclosed in the
notes to financial
statements; or,
b. Secure Borrowing- a
liability equal to the face
amount of the note is
recognize
FORMULA
Maturity Value= Principal + Interest for the full term of the note
Discount period= Full term - expired term
Discount= Maturity value x Discount rate x Discount period
Net proceeds= Maturity value - Discount
Interest Income= Accrued interest as of the date of discounting
