Question

You are spending the summer working for a local wholesale furniture company, Samson Furniture, Inc. The company is considering a proposal from a local financial institution, Old Reliant Financial, to factor Samson’s receivables. The company controller is unfamiliar with the prevailing GAAP that deals with accounting for the transfer of financial assets and has asked you to do some research. 

The controller wants to make sure the arrangement with the financial institution is structured in such a way as to allow the factoring to be accounted for as a sale. Old Reliant has offered to factor all of the company’s receivables on a “without recourse” basis. Old Reliant will remit to Samson 90% of the factored amount, collect the receivables from Samson’s customers, and retain the remaining 10% until all of the receivables have been collected. When Old Reliant collects all of the receivables, it will remit to Samson the retained amount, less a 4% fee (4% of the total factored amount). 

 

Required: 

1. Access the relevant authoritative literature on accounting for the transfer of financial assets using the FASB Accounting Standards Codification. You might gain access at the FASB website (www.fasb.org), from your school library, or some other source. What conditions must be met for a transfer of receivables to be accounted for as a sale (or in accounting terms, “derecognized”)? What is the specific seven-digit Codification citation (XXX-XX-XX) that Samson would rely on in applying that accounting treatment? 

2. Assuming that the conditions for treatment as a sale are met, prepare Samson’s journal entry to record the factoring of $400,000 of receivables. Assume that the fair value of the last 10% of Samson’s receivables is equal to $25,000. 

3. An agreement that both entitles and obligates the transferor, Samson, to repurchase or redeem transferred assets from the transferee, Old Reliant, maintains the transferor’s effective control over those assets and the transfer is accounted for as a secured borrowing, not a sale, if and only if what conditions are met?

Answer 1

Financing with receivables

Selling or pledging the accounts receivables with the financial institutions by the companies in order to boost their cash position, instead of waiting for the time till the credit customers pay their dues, is referred to as Factoring or Securitization of accounts receivable.

 

1.

According to FASB ASC 860-10-40-5: “Transfers and Servicing – Overall- Derecognition- Criteria for a Sale of Financial Assets.”

 

“The transferor is determined to have surrendered control over the receivables if and only if all of the following conditions are met:

 

a.

The transferred assets have been isolated from the transferor –put presumptively beyond the reach of the transferor and its creditors-even in bankruptcy or other receivership.

 

b.

Each transferee has the right to pledge or exchange the assets it received.

 

c.

The transferor does not maintain effective control over the transferred assets through either (1) an agreement that the transferor repurchase or redeem them before their maturity or (2) the ability to cause the transferee to return specific assets”

 

(These criteria were included in Statement of Financial Accounting Standards No.140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” which is subsequently modified by SFAS No.166, “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No.140”

 

2.

The amount of receivable factored is $400,000, cash received is $360,000(90% of $400,000), balance of receivable after deducting 4% fee is $9,000

 

{[$25,000(fair value) - $16,000(4$ of $400,000)]}

Loss on sale of receivables = (Accounts receivable – Cash received-Balance receivable from

                                                             factor

 

$400,000 - $360,000 - $9,000 = 31,000

 

Prepare the journal entry to record the factoring of $400,000, as follows:

 

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
xxxx	Cash		360,000
	Loss on sale of receivables		31,000
	Receivable from factor		9,000
	Accounts receivable			400,000

 

Explanations:

Cash is an asset and increases hence, debit cash account.

Loss on sale of receivables is a component of stockers’ equity and decrease it, hence debit loss on sale of receivables account.

Receivable from factor is an asset and increases, hence debit receivable from factor account.

Accounts receivable is an asset and decreases, hence credit accounts receivable account.

 

3.

When the transferor repurchase or redeem the transferred asset from the transferee and maintain the transferor’s effective control over those assets and the transfer is accounted for as a secured borrowing, not a sale, if and only if the following conditions of FASB ACS 860-10-40-24: “Transfers and Servicing- Overall- Derecognition- Effective Control Through Both a Right and on Obligation(previously paragraph 47 of SFAS No.140)” are met:

 

a. “ The assets to be repurchased or redeemed are the same or substantially the same as those transferred,

 

b. The transferor is able to repurchase or redeem then on substantially the agreed terms, even in the event of default by the transferee.

 

c. The agreement is to repurchase or redeem them before maturity, at a fixed or determinable price.

 

d. The agreement is entered into concurrently with the transfer.

Financing with receivables

Selling or pledging the accounts receivables with the financial institutions by the companies in order to boost their cash position, instead of waiting for the time till the credit customers pay their dues, is referred to as Factoring or Securitization of accounts receivable.