nov7class (1) - Financing With Receivables GAAP method...

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Financing With Receivables GAAP method depends on the surrender of control over the receivables transferred.
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Sale and collateralized borrowing There are two ways to accelerate cash collections: Companies might want to accelerate cash collection: (1) to avoid processing and collection costs; (2) because of a cash flow imbalance between supplier payments and receivable collections; or (3) to fund an immediate cash need.
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Is it a sale or a borrowing? The FASB has provided guidelines in the Accounting Standards Codification However, ambiguities abound. Sale of receivables : Is control surrendered? w Receivables removed from balance sheet w Gain or loss recognized in income Borrowing against receivables w Receivables stay on balance sheet w Loan shown as balance sheet liability. w No gain or loss recognized in income Sale Borrowing w Assets are beyond reach w Buyer has right to dispose w Seller has no obligation to repurchase Yes No
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Sale of Receivables Without recourse An ordinary sale of receivables to the factor. Factor assumes all risk of uncollectibility. Control of receivable passes to the factor. Receivables are removed from the books, cash is received and a financing expense or loss is recognized. With recourse Transferor (seller) retains risk of uncollectibility. Must meet the three conditions of determining surrender of control to be recognized as a sale. If the transaction fails to meet the three conditions necessary to be classified as a sale, it will be treated as a secured borrowing .
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Secured borrowing Assigning The use of specific receivables for collateral, and the promise that any failure to repay debt will result in proceeds from specific accounts receivable collections being used to repay the debt. Reclassify Accounts Receivable as Accounts Receivable Assigned. Pledging Receivables in general are pledged as collateral for loans. Pledged receivables are disclosed in notes to the financial statements.
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for cash Securitization of Receivables EXAMPLE: Bank forms a bundled portfolio of 7% home mortgage receivables of “moderate” risk. A third-party investor is willing to buy the portfolio at a price that yields a 6% return. Because the selling price at 6% is higher than the carrying value of the mortgages, the bank records a gain. Both the bank and the investor win in
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This note was uploaded on 11/20/2011 for the course FINANCE 640,722 taught by Professor Chabiyo,reeves during the Fall '11 term at Ohio State.

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nov7class (1) - Financing With Receivables GAAP method...

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