RECEIVABLE FINANCING
It is the financial flexibility or capability of an entity to
raise money out of its receivable.
FORMS OF RECEIVABLE FINANCING
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Pledge of accounts receivable
Assignment of accounts receivable
Factoring of accounts receivable
Discounting of accounts receivable
PLEDGE OF ACCOUNTS RECEIVABLES
✓ Loan is recorded by debiting cash and discount on
NP if loan is discounted and crediting NP
✓ Subsequent payment is recorded by debiting NP
and crediting cash
✓ No entry would be necessary for the pledged
accounts. Only a disclosure in the notes is made.
ASSIGNMENT OF ACCOUNTS RECEIVABLES
✓ A more formal type of pledging AR
✓ Assignment is secured borrowing evidenced by
financing agreement and a promissory note both
of which the assignor signs.
✓ A borrower called ASSIGNOR transfers rights in
some AR to a lender called ASSIGNEE in
consideration for a loan
✓ Pledging is general whereas assignment is
specific.
✓ Can be done either on a nonnotification or
notification basis
FACTORING AS A CONTINUING ARRANGEMENT
FACTORING OF ACCOUNTS RECEIVABLES
✓ It is a sale of AR usually on a without recourse,
notification basis.
✓ In this arrangement, an entity sells AR to a bank
or finance entity called a factor.
✓ A gain or loss is recognized for the difference
between the proceeds received and the net
carrying amount of the receivables factored
✓ In factoring, an entity actually transfers
ownership of AR to the factor hence he assumes
responsibility for any uncollectible factored
accounts.
✓ Whereas in assignment, the assignor retains the
ownership of AR.
✓ Factoring could be – casual factoring or factoring
as a continuing arrangement
✓ A finance entity purchases all of the AR of a
certain entity
✓ The factor assumes the credit function and
collection function
✓ To compensate, the factor typically charges a
commission or factoring fee. Likewise, the factor
may withhold a predetermined amount as a
protection against customer returns and
allowances and other adjustments. This amount is
called “FACTOR’S HOLDBACK”.
✓ Factor’s holdback is a receivable from factor and
classified as current asset.
✓ Final settlement of the factor’s holdback is made
after the factored receivables have been fully
collected.
DISCOUNTING OF NOTE RECEIVABLE
✓ Discounting specifically pertains to a note
receivable
✓ The original parties here are the maker (one
liable) and the payee (the one entitled to
payment on the date of maturity)
✓ When a note is negotiable, the payee may obtain
the cash before maturity date by discounting the
note at a bank or other financing company
✓ To discount, the payee must endorse it. Hence,
legally the payee becomes an endorser and the
bank becomes an endorsee
ENDORSEMENT
CREDIT CARD
✓ Transfer of right to a negotiable instrument by
simply signing at the back of the instrument
✓ Endorsement with recourse, the endorser shall
pay the endorsee if the maker dishonors the note
✓ Endorsement without recourse, the endorser
shall avoid future liability even if maker refuses to
pay the endorsee on the date of maturity
✓ In the absence of any evidence, endorsement is
assumed to be with recourse
b. If the entity has retained control over the
asset, the financial asset is not derecognized.
CONCLUSION
CONDITIONAL SALE OR SECURED BORROWING
An entity shall derecognize a financial asset when
either one of the following criteria is met:
a. The contractual rights to the cash flows of the
financial asset have expired
b. The financial asset has been transferred and
the transfer qualifies for derecognition based
on the extent of transfer of risks and rewards
of ownership
CONDITIONAL SALE OR SECURED BORROWING
Guidelines for derecognition based on the extent of
transfer of risks and rewards:
✓ If the entity has transferred substantially all risks
and rewards, the financial asset shall be
derecognized.
✓ If the entity has retained substantially all risks and
rewards, the financial asset shall not be
derecognized.
✓ If the entity has neither transferred nor retained
substantially all risks and rewards, derecognition
depends on whether the entity has retained
control of the asset.
a. If the entity has lost control of the asset, the
financial asset is derecognized in its entirety.
✓ It is believed that the discounting of note
receivable with recourse is to be accounted for
as a conditional sale with recognition of a
contingent liability.
✓ The main justification is that upon discounting or
endorsement of the note receivable, whether
with or without recourse, the transferor or
endorser has lost control over the note
receivable.
✓ Accordingly, the transferee has complete control
over the note receivable because the transferee
has the practical ability to sell the asset to a third
party without attaching any restrictions to the
transfer.