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Types of Receivable Financing Explained

This document discusses different types of receivable financing including pledging, assigning, factoring, and discounting accounts and notes receivable. It provides details on secured borrowing and the sale of receivables. Secured borrowing involves using accounts receivable as collateral for a loan, while sale of receivables transfers ownership to another business. Factoring involves selling accounts receivable to a factor at a discount in exchange for immediate cash. Discounting involves selling negotiable notes receivable to a bank or finance company in exchange for cash.

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John Cedfrey Narne
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797 views9 pages

Types of Receivable Financing Explained

This document discusses different types of receivable financing including pledging, assigning, factoring, and discounting accounts and notes receivable. It provides details on secured borrowing and the sale of receivables. Secured borrowing involves using accounts receivable as collateral for a loan, while sale of receivables transfers ownership to another business. Factoring involves selling accounts receivable to a factor at a discount in exchange for immediate cash. Discounting involves selling negotiable notes receivable to a bank or finance company in exchange for cash.

Uploaded by

John Cedfrey Narne
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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  • Receivable Financing
  • Secured Borrowing
  • Assignment of Accounts Receivable
  • Sale of Receivables
  • Discounting on Notes Receivable
  • Derecognition of AR and NR
  • Financial Statement Presentation

Receivable Financing

Type of Receivable Financing:

1. Pledging of A/R
2. Assignment of A/R
3. Factoring of A/R
4. Discounting of N/R

Disposition of Accounts and Notes Receivable

 Owner may transfer accounts or notes receivables to another company for cash.

Reasons:

 Competition
 Sell receivables because money is tight
 Billing/collection are time-consuming and costly

Transfer accomplished by:

1. Secured borrowing – puts AR as a collateral for a loan


2. Sale of receivables – transfer the AR to another business
Secured Borrowing (Highlights)

Transferor (borrower/assignor)

 Records a finance charge for any transaction cost.


 Collects accounts receivable (if non-notification basis)
 Record sales returns and sales discounts
 Absorbs bad debts expense
 Pays on the note periodically from collections

Transferee

 Lends only a certain percentage of the face value of the receivables.


 The percentage depends on the quality of the receivables

Pledging of Accounts Receivables

 Continues to recognize and report the receivable with appropriate disclosure


 Recognize the proceeds (loan) as a liability
 Recognize interest on the carrying value of the liability subsequent to initial recognition of the
liability either based on nominal or effective rate whichever is clearly determinable.
Secured Borrowing

Assignment of AR

 General Assignment
o Same as pledge of AR
 Specific Assignment
o Specified accounts receivable pledged
o Accounts Receivable reclassified as Account Receivable Assigned
o Footnote disclosure of loan provisions required
o Recognize interest on the carrying value of the liability subsequent to initial recognition
of the liability either based on nominal or effective rate whichever is clearly
determinable.
Sale of Receivables

 Factoring of accounts receivable on a without recourse, notification basis.


 The seller of the receivables is transferor while the buyer is called a transferee or factor.
 Casual factoring
o A company is forced to factor its receivable at a substantial discount to obtain cash
o One-time deal
 Continuing Agreement
o Financing company purchases all of the accounts receivable of a company
o Factor charges commission or factoring fee
o Factor’s holdback for possible returns and allowances

Factoring of receivables

 Transferor
o Transfers ownership of receivables to factor.
o Records any amount retained by transferee as “receivable from factor “or “due from
factor” or “factor’s holdback”
o Records loss on sale/ loss on factoring of receivables
o Records any component liability (when appropriate)
 Factor records the (transferred) accounts as assets in its books.

Accounting for Factoring of Accounts Receivables

 Close sold receivables


 Close accompanying Allowance for Bad debts
 Expense any factoring charges
 Establish a receivable for any sales price withheld by factor
 Debit cash for net proceeds of the sale
 Recognize a gain or loss from factoring
Sale of Receivables with Recourse

 When receivables are sold with recourse, a purchaser of receivables retains the right to collect
from the seller when the seller’s customer fail to make payments when due.

Illustration:
Discounting on Notes Receivable

 Transfer of negotiable notes to a bank or finance company willing to exchange such instruments
for cash
 Endorsement may be with or without recourse
 Pro-forma entries:

Contingent Liability

Receivable Financing Type of Receivable Financing: 1. Pledging of A/R 2. Assignment of A/R 3. Factoring of A/R 4. Discounting
Secured Borrowing (Highlights) Transferor (borrower/assignor)  Records a finance charge for any transaction cost.  Collects
Secured Borrowing Assignment of AR  General Assignment o Same as pledge of AR  Specific Assignment o Specified accounts rec
Sale of Receivables  Factoring of accounts receivable on a without recourse, notification basis.  The seller of the receiva
Sale of Receivables with Recourse  When receivables are sold with recourse, a purchaser of receivables retains the right to
Discounting on Notes Receivable  Transfer of negotiable notes to a bank or finance company willing to exchange such instrume

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