RECEIVABLE FINANCING

FAR by Raymund Francis A. Escala

DEFINITION
Receivable Financing is the acceleration of
collection of receivables.
It is the financial flexibility or capability of an
entity to raise money out of its receivable.
COMMON FORMS
❑ Receivable as Loan Collateral
❑ Factoring
❑ Discounting of Notes Receivables
RECEIVABLE AS LOAN COLLATERAL
The use of receivables as a loan collateral can
either be a designated as
➢ pledge of accounts receivable; or
➢ assignment of accounts receivables.
RECEIVABLE AS LOAN COLLATERAL
❖ Pledge
✓ Total or all of the accounts receivable is used.
✓ A disclosure is made of the fact that receivables have
been pledged.
✓ The accounts receivable is accounted for normally but are
not reclassified.
✓ Accounting for the loan shall be made with respect to the
proceed, recording of interest and payment of the
principal.
RECEIVABLE AS LOAN COLLATERAL
❖ Assignment
✓ A specific portion or specific accounts receivable is
used as collateral. Not all of the accounts
receivable balance.
✓ May be done on notification or non-notification
basis.
✓ A reclassification is made on the assigned accounts.
RECEIVABLE AS LOAN COLLATERAL
❖ Assignment
✓ Disclosure on the “equity in assigned accounts” of
the assignor is made in the notes, which is
calculated as follows:
AR-assigned, net xxx
Less: Carrying amount of the loan xxx
Equity in assigned accounts xxx
RECEIVABLE AS LOAN COLLATERAL - ASSIGNMENT
NON -NOTIFICATION BASIS NOTIFICATION BASIS
Payments are Cash XXX
made by Accounts receivable-assigned XXX
customers
Customers return Sales returns XXX Sales returns XXX
some goods Accounts receivable-assigned XXX Accounts receivable-assigned XXX
Customers availed Sales discounts XXX
cash discounts Accounts receivable-assigned XXX

Collections are Loans payable XXX

remitted to the Interest expense XXX
assignee Cash XXX
Loans payable XXX

When advice from Interest expense XXX

the assignee is Sales discounts XXX
received Accounts receivable-assigned XXX
FACTORING
Factoring is the sale accounts receivable to a finance company,
which is called the factor.
The factor assumes the risk of collectivity and generally handles
the billing and collection of the receivable.

Can be either a
➢ casual factoring; or
➢ factoring as a continuing agreement.
FACTORING
❖ Casual factoring
✓ A sale of the receivables at a discount.
✓ This is similar to any type of sale of an asset in order to generate cash
quickly. However, the sale is always made below the carrying amount or
the net realizable value of the accounts receivable and therefore a loss
shall be recognized as follows:
Proceeds from factoring xxx
Less: Carrying amount of AR
Accounts receivable xxx
Allowances (xxx) (xxx)
Loss on factoring xxx
FACTORING
❖ Casual factoring
Pro-forma journal entry
Cash xxx
Loss on factoring xxx
Allowance for doubtful accounts xxx
Accounts receivable xxx
FACTORING
❖ Factoring as a continuing agreement
✓ Involves the sale of accounts receivable to a financing
entity on a long-term basis and where the buyer is
committed to buy the receivables before the actual
goods are sold to the customers on credit.
✓ The collection and credit responsibilities are
surrendered to the buyer as soon as goods are delivered
to the customers.
FACTORING
❖ Factoring as a continuing agreement
✓ Proceeds from factoring is determined as follows:
Face value of AR xxx
Less: Service fee or commissions xxx
Interest charges xxx
Factor’s holdback xxx (xxx)
Proceeds from factoring xxx
NOTES:
Both the service fee and interest shall be recognized as a loss.
The factor’s holdback is a receivable and an amount where the factor shall deduct the sales
discounts and sales returns taken by the seller’s customers before finally remitting to the
seller the remaining balance when all of the accounts receivable is collected.
FACTORING
❖ Factoring as a continuing agreement
Pro-forma journal entry
Cash xxx
Service fees xxx
Interest expense xxx
Factor's holdback xxx
Allowance for doubtful accounts xxx
Accounts receivable xxx
DISCOUNTING OF NOTES RECEIVABLE
Discounting of notes receivable may be done on a with or without
recourse basis.
The amount of proceeds from discounting on notes may be
calculated as follows:
Face value or principal xxx
Interest on maturity xxx
Maturity Value xxx
Less: Discount
(MV x DR x Discount period) (xxx)
Proceeds from discounting xxx
DISCOUNTING OF NOTES RECEIVABLE
➢ Without recourse
✓ This represents the absolute sale of notes receivable.
✓ Notes receivable sold will be derecognized
✓ Amount received will represent from the proceeds of
sale of the notes. A loss on discounting is normally
recognized.
DISCOUNTING OF NOTES RECEIVABLE
➢ With recourse
✓ Notes receivable can also be sold but is usually with
recourse. This means that the seller is contingently liable if
the maker of the promissory is not able to pay the maturity
value at maturity date.
✓ Discounting of Notes Receivable can either be accounted for
as a conditional sale or a secured borrowing.
✓ The only difference between the two methods is the
recognition of a loss and interest expense as well as
recording a liability under a secured borrowing arrangement.
DISCOUNTING OF NOTES RECEIVABLE
WITHOUT RECOURSE CONDITIONAL SALE SECURED BORROWING
Cash XXX Cash XXX Cash XXX
Loss on discounting XXX Loss on discounting XXX Interest expense XXX
Notes receivable XXX Notes receivable discounted XXX Liability on NR-Discounted XXX
Interest income XXX Interest income XXX Interest income XXX
When payment is made by the maker
Notes receivable discounted XXX Liability on NR-Discounted XXX
Notes receivable XXX Notes receivable XXX
When payment is dishonored by the maker
Notes receivable discounted XXX Liability on NR-Discounted XXX
Notes receivable XXX Notes receivable XXX
Accounts receivable XXX Accounts receivable XXX
Cash XXX Cash XXX
When collection from the maker is made
Cash XXX Cash XXX
Accounts receivable XXX Accounts receivable XXX
Interest income XXX Interest income XXX
Thank You !!!