RECEIVABLE FINANCING

● The act of inducing cash inflows from receivables other than from their normal or scheduled ILLUSTRATION - ASSIGNMENT
payments. On March 1, 20x1, ABC Co. assigned P4,000,000 accounts receivable to Piggy Bank in exchange for a
● Financial flexibility or capability of an entity to raise money out of its receivables 2-month, 12% loan equal to 75% of the assigned receivables. ABC Co. received the loan proceeds
Common forms: after 2% deduction for service fee based on the assigned accounts. During March 1,
1. Pledging/Hypothecation P2,500,[Link] discounts amounted to P50,000.
2. Assignment 1. Provide The Journal Entry
3. Factoring 2. How much is the equity in the assigned receivables?
4. Discounting
TRANSACTIONS NON-NOTIFICATION BASIS NOTIFICATION BASIS
1. PLEDGE/HYPOTHECATION/ GENERAL ASSIGNMENT (COMMON)
● Borrowing of money from the bank or any financial institution in which receivable in general is Record the Assignment
used as collateral or as security for a loan
● Treated as secured borrowing (pledgor/borrower retains control of the pledged receivables) Record receipt of loan
● Pledged receivable is not derecognize (Continue to recognize and report receivable with
appropriate disclosure) Record Collection
● No Entry is made for the pledged receivables
● Only the loan transaction is recorded
Remittance of collections to the
Recording Loan Transaction assignee(lender), plus interest
Interest is not deducted in advance Interest is deducted in advance
Cash Cash Assignee(Lender) Notifies
Loan Payable Discount on Loans Payable Assignor (Borrower) of the
Loan Payable
collection
2. ASSIGNMENT Assignor (Borrower) pays the
interest

TRY TO ANSWER AT HOME

On December 1, 2011, Hero Company assigned P400,000 of accounts receivable to Halo Company as a security for a
loan of P335,000. Hero Company charged a 2% commission on the amount of the loan; the interest rate on the note
was 10%. During December, Hero collected P110,000 on assigned accounts after deducting P380 of discounts. Hero
accepted returns worth P1,350 and wrote off assigned accounts totaling P2,980.
● Is a formal form of pledge wherein the receivable used as collateral security for borrowing are
specifically identified and stated in the loan contract Question 1 How much cash did Hero receive from Halo at the time of the transfer?
● Also a secured borrowing a) P301,500 c) P328,300
● No derecognition of receivables b) P327,000 d) P335,000
● Reclassifies assigned receivables as Receivables-Assigned (Treated as regular receivables)
● Equity in the assigned receivable is disclosed in the notes Question 2. What is the carrying value of the account receivable assigned as of December 31, 20112
a) None с) P289,620
b) ₽285,290 d) ₽290,000
Equity in the assigned receivable
• Is the carrying amount of the assigned receivables On December 1, 2011, MM Company assigned on a non-notification basis accounts receivable of P3,000,000 to a bank
minus carrying amount of the related loan payable in consideration for a loan of 80%. of the receivables less a 5% service fee on the accounts assigned. "The interest rate
(Asset - Liability = Equity) of the loan is 12% per annum. The company collected assigned accounts of P2,000,000 and remitted the collections to
• Only a note disclosure the bank in partial payment for the loan. The bank applied first the collection to the interest and the balance to the
principal. The interest rate is 1% per month on the outstanding balance of the loan. In its December 31, 2011 statement
of financial position, what amount of note payable should M,M, report as current liability?
FORMS OF ASSIGNMENT
a) None с) Р 424,000
Notification Basis Non-notification Basis (Common) b) ₽400,000 d) P1,024,000
Assignor/Borrower notifies the debtor whose Assignor/Borrower does NOT notifies the debtor whose receivables
receivables have been assigned have been assigned
Debtor (Customer) remits payment directly to Debtor (Customer) remits payment directly to the assignor/borrower.
the assignee/lender Then, the borrower remits the collection to the lender.
3. FACTORING
● Sale of receivable to a financing company which is called a factor. (Outright sale) REGULAR MEANS OF FINANCING
● Factor assumes the risk of collectability and generally handles the billing and collection. Without Recourse With Recourse
● Transfer of AF requires derecognition

CASUAL BASIS
Without Recourse/ With recourse
Without Recourse With Recourse
Without Recourse With Recourse

● Factor assumes the risk of un- collectability and credit ● In the event the debtor fails to pay, the transferor is
losses liable for the
● In the event the debtor fails to pay, the transferor is NOT ● guaranteed amount
liable ● Recorded using financial component Approach-
● Outright sale (Substance and Form) Continuing involvement
● The factored receivable si derecognized entirely ● Recognize only the assets and liabilities that it controls
after the transfer SETTLEMENT OF FACTOR’S HOLDBACK
Without Recourse With Recourse
Factor's Holdback
● In the factor of receivable, the transferor is responsible for any reduction in the collection of
receivables due to sales returns and discounts.
● Factor usually retains a certain percentage of the transferred receivable known as Factor's holdback
or receivable from factor
● Any excess will be returned to the transferor when the receivables are fully collected and no
further sales returns and discounts
SOLUTION:
Casual basis vs Regular means of financing
The factor normally charges the transferor commission or service fee and interest
Casual basis Regular means of financing
Charges are recorded as loss Charges are recorded as regular expenses.
Example: commission expense, interest expense, ILLUSTRATION 2- FACTORING
service fee/charge Corny Company factored P100,000 of its accounts receivable to H company for 85,000.
Cost of factoring = Loss on factoring Cost of factoring = An allowance for bad debts equal to 3,000 was previously established for the account factored. H company
All charges + Recourse Obligation if there's any withheld 5% of the purchase price as protection against sales returns and allowance.
Gross Amount of the Loan CASE 1. Sale of receivable is without recourse
Less: All charges CASE 2. Sale of receivable is with recourse and the recourse @bligation has an estimated Fair value of 5,000
Less: Recourse obligation (If any) Requirements
Net Selling Price 1. Cash received
Less: BV of AR
2. Cost of factoring
Loss on Sale= Cost of factoring
ILLUSTRATION 1- FACTORING SOLUTION: COST OF FACTORING:
On January 1, 20x1 ABC Co. factored P60,000 accounts receivable to XYZ Financing Corp. XYZ charged a 4%
service fee and retained a 10% hold back to cover expected sales returns. in addition, XYZ charged 12% interest
computed on weighted average time to maturity of the receivables of 73 days based on 365 days. (Assume a fair
value of P3,000 for the recourse obligation in the "with recourse scenario")
● Provide the journal entries
● Compute the Proceeds from Factoring
● Compute the cost of factoring
ILLUSTRATION 3- FACTORING The discount rate, which is usually higher, is different from the stated rate. Discount rate is the amount of
Andrix Co. factored P600,000 of its accounts receivable to Sabado Company on October 1. Control was advance interest charged by the bank or other financial institutions. On the other hand, the stated rate is the
surrendered by Andrix Co. The factor assessed a fee of 3% and retained a holdback equal to 5% of the accounts interest rate appearing on the face of the promissory note.
receivable. In addition, the factor charged 15% interest computed on the weighted average time to maturity of
54 days (Use 365 days in the computation of the interest). 4.) Finally, compute for the net proceeds using the Discount computed in Step 3:
Requirements: Net Proceeds = Maturity Value - Discount
1. Cash Proceeds
2. Cost of Factoring ILLUSTRATION 1- DISCOUNTING
On January 1, 2023, TALUGTUG Company received a 9% interest- bearing promissory note, with P4,000,000
SOLUTION: COST OF FACTORING: face amount, from one of its customers. The note will mature on September 30, 2023. Required: Under each of
the following independent scenarios, determine the net proceeds from the discounting;
Scenario A. The note was discounted on April 1, 2023 at a 12% discount rate.
Scenario B The note was discounted on July 1, 2023 at a 12% discount rate.
Scenario C. The note was discounted on July 1, 2023 at a 14% discount rate.

SCENARIO A SCENARIO B SCENARIO C

1. Interest
4. DISCOUNTING OF NOTES RECEIVABLE
Every note receivable has a stated maturity date. The entity needs to wait until maturity date to
receive the note's maturity value. However, tight cash positions may compel an entity to look for 2. Maturity Value
ways to turn notes receivable into cash even before the maturity date. This is when the discounting of
notes receivable comes in to help the entity manage its cash outflows.
3. Discount

4. Net Proceeds

NET PROCEEDS FROM DISCOUNTING

Maturity value of notes receivable (Principal +Interest) Pxx
Less: Amount of discount (xx)
Net proceeds from discounting of notes receivable Pxx
ACCOUNTING FOR THE DISCOUNTING OF NOTES RECEIVABLE
The accounting for the discounting transaction will depend on the entity's liability (whether with or
The detailed step-by-step procedures in determining the net proceeds from discounting are as follows: without recourse) after its notes receivable has been discounted:
1.) First, compute for the total interest using the period from the note's issue date up to its maturity date as the Discounted Without Recourse Discounted With Recourse
"Time" in the following formula:
Entity is not liable in case the Entity is still liable in case the maker did not pay the bank or other
Total Interest =Principal x Stated Rate x Time
maker did not pay the bank or party who discounted the note. This is classified into either of the
2.) Next, compute for the maturity value using the following formula: other party who discounted the following:
Maturity Value =Principal +Total Interest note. 1. Conditional sale - the sale will be fully effective upon the full
It should be noted that noninterest-bearing note's maturity value is equal to its principal amount (i.e., no payment of the maker.
interest is added to arrive at maturity value).
2. Secured borrowing - the note receivable merely serves as a
3.) Determine the Discount amount by using the period from the date of discounting up to the note's maturity security (collateral) in the same manner as the pledged receivables
date as the "Time" ni the following formula: in the previous discussion.
Discount =Maturity Value xDiscount Rate x Time
 Discounted Without Recourse Discounted With Recourse DISCOUNTING WITH RECOURSE - THE MAKER FAILED TO PAY
Cash xx If conditional sale: A note is considered as dishonored if the maker failed to pay.
Loss on discounting, if any xx Cash xx No further accounting issues will arise if the discounting is without recourse.
Notes receivable xx Loss on discounting, if any xx Additional accounting procedures shall be made if the discounting is with recourse to account for the
Interest income xx Notes receivable - discounted xx entity's liability to the bank or other financial institutions.
Gain on discounting, if any xx Interest income xx The following are the accounting procedures if the maker dishonored the note and that the
Gain on discounting, if any xx discounting is made with recourse:
Notes receivable account is credited since the entity is not liable Almost similar to discounting without recourse except for the a. Derecognize the dishonored notes receivable and the related notes receivable - discounted for
anymore in case the maker did not pay. account credited. Notes receivable - discounted is a
contingent liability account and presented as a deduction from conditional sale) or loan payable (for secured borrowing).
notes receivable account. b. Recognize, as a receivable from the maker, the total amount paid to the bank. These amounts
Interest income is computed from the note's issue date up to the If secured borrowing: include the note's face amount, interest, protest fees, and other charges that the bank may require
date of discounting. This computation is also applicable to from the entity.
discounting with recourse scenarios.
Cash xx
Interest expense, if any xx c. Generally, no further gain or loss will be recognized since the amounts paid to the bank are
Loan Payable xx recoverable from the maker.
The amount of gain or loss is a squeeze amount. Most of the d. The receivable from the maker shall be derecognized upon full payment of the maker which may
time, there is a loss on discounting since the discount rate is
Interest income xx
almost always higher than stated rate. or may not include additional interest.
Since the note receivable is just a collateral, it is not
derecognized. Instead, a separate liability will be recognized. Same scenario with CUYAPO Company from ILLUSTRATION 2- DISCOUNTING
- Assume that on August 31, 2024, the maker did not pay the bank, and that the Company
The supposed loss on discounting is reported as interest became liable to pay the maturity value and P400,000 protest fee to the bank. The following
expense, while the supposed gain is added to the interest are the journal entries to record the entity's liability:
income.
Scenario B- Conditional Sale Scenario C- Secured Borrowing
ILLUSTRATION 2- DISCOUNTING
On September 1, 2023, CUYAPO Company received an 11% interest- bearing promissory note with a
face amount of P3,000,000 and maturity date of August 31, 2024. Required: Assuming that on October
31, 2023, the Company discounted it with a bank at a 14% discount rate, record the journal entry u n
d e r each of the following independent scenarios:
Scenario A. Discounting is without recourse
Scenario B. Discounting is with recourse and considered as conditional sale DISCOUNTING OF AN ENTITY'S OWN PROMISSORY NOTE
Scenario C. Discounting si with recourse and considered as a secured borrowing An entity may also issue its own promissory note when borrowing funds from a bank or other
SCENARIO A SCENARIO B SCENARIO C financial institutions. In this case, the discounting of the entity's own promissory note will involve
1. Interest the advance deduction of interest to arrive at the net proceeds from discounting.

2. Maturity Value ILLUSTRATION 3- DISCOUNTING

On January 1, 2023, PAPAYA Company discounted its own 6-month, P2,000,000 face amount
promissory note with a bank at a discount rate of 10%.
3. Discount
SCENARIO A
2. Maturity Value
4. Net Proceeds 3. Discount
4. Net Proceeds
Journal Entry
Journal Entry
 SUMMARY

1. Receivable financing methods accelerate the availability of cash from the entity's receivables. DISCOUNTING
18. Discounting is a form of notes receivable financing involving the "selling" of receivables.
PLEDGING 19. The proceeds from discounting of notes receivable can determined as follows:
2. In pledging, the general balance of accounts receivable serves as the collateral for the related Principal amount Pxx
loan. Accounts receivable is not derecognized and no gain or loss shall be recognized from the Add: Interest until maturity, if any xx
pledged receivables. Maturity value Pxx
3. In pledging, the proceeds are recognized as a separate liability. Related interest expenses shall Less: Discount amount (xx)
also be recognized separately. Net proceeds from discounting Pxx

ASSIGNMENT The discount amount is determined as Maturity Value x Discount Rate x Time from Date of
4. In assignment, specific accounts receivable serve as the collateral for the related loan. The amount Discounting Until Maturity Date.
loaned to the entity is usually less than 100% of the assigned accounts receivable balance to
account for possible returns, discounts, and write- offs. 20. The gain or loss on discounting shal eb determined as the difference between the following:
5. The amount of proceeds from assignment is determined as Proceeds = (Assigned Accounts Carrying amount of the note, including accrued interest, if any Pxx
Receivable x% Loaned) - Finance or Service Charge. Less: Net proceeds from discounting (xx)
6. Assigned accounts receivable are not derecognized but transferred to separate accounts Loss (gain) on discounting Pxx
receivable account (i.e., Accounts Receivable - Assigned).
7. Assignment can either be made through notification or non-notification basis. 21. There are three forms of discounting of notes receivable: without recourse, conditional sale, and
8. If the assignment is made through notification basis, the debtors shall pay the bank directly secured borrowing. Their primary difference arises from the entity's liability in case the maker
instead of the entity. Any excess collection of the bank shall be returned to the entity. of the note did not pay the bank.
9. If the assignment is made through non-notification basis,the debtors shall continue ot pay the 22. Conditional sale and secured borrowing will make the entity still liable to the bank.
entity, but the payments are required to be periodically remitted to the bank. 23. The account to be credited for discounting without recourse is the notes receivable account; for
[Link] from assigned receivables is equal to the balance of assigned receivables less the balance conditional sale, it is the notes receivable discounted account; and for secured borrowing, it is
of the related borrowing. the loan payable account.
11. If a sale is made through the customer's credit card, the receipt of cash is accelerated since the
credit card issuer (i.e., a bank) pays the entity sooner than the customer normally could.

FACTORING
12. Factoring is a form of receivable financing Involving the "selling" of receivables.
13. As to frequency, factoring can either be casual factoring (i.e., one-time factoring) or regular
factoring (i.e., continuous factoring).
14. As to the liability of the entity related to the factored accounts, factoring can either be without
recourse (i.e., the entity is not liable) or with recourse (i.e., the entity is still liable).
15. The proceeds from factoring can be determined as follows:
Balance of factored accounts receivable Pxx
Less: Factor's holdback (% x factored accounts receivable), if any (xx)
Factoring charge or commission, if any (xx)
Financing charge (interest expense), if any (xx)
Net proceeds from factored accounts receivable Pxx

16. In factoring, the factored receivables are derecognized and the difference between the proceeds
and the carrying amount of factored receivables is recognized in profit or loss.
17. In factoring with recourse, a recourse obligation shall be recognized at its fair value. This has the
effect of increasing the loss to be recognized from factoring.