Receivable Financing

Receivable Financing - financial flexibility or capability of an entity to raise money out of its receivables

Common Forms of Receivable Financing

1. Pledge of Accounts Receivable
2. Assignment of Accounts Receivable
3. Factoring of Accounts Receivable
4. Discounting of Notes Receivable

Pledge of Accounts Receivable

- no journal entry is necessary with respect to the pledged accounts receivable
- it is sufficient the disclosure is made in the note to financial statement “The Note Payable to bank matures on December
31, 2020 and is secured by Accounts Receivable with face value of 1,000,000.”

Assignment of Accounts Receivable

- more formal type of pledging of accounts receivable
- specific accounts are assigned (compare to pledging in which all accounts are pledged as collateral)

Features of Assignment of Accounts Receivable

1. Assignment may be done
a. Non-notification Basis - usually the case, customers are not informed that their accounts have been assigned
b. Notification Basis - customers are notified to make their payment directly to the assignee
2. The bank or a finance entity evaluates the entity’s accounts receivable lends only a percentage of the face of the
accounts assigned for factors such as sales discount, sales returns and allowances and uncollectible accounts; Percentage
may be 70%, 80% or 90% depending on the quality of the accounts
3. The assignee usually charges a fee for the assignment - Service Charge or Finance Charge

Presentation of the Assigned Accounts

Accounts Receivable has two classifications:
a. Accounts Receivable - Unassigned
b. Accounts Receivable - Assigned

For the disclosure in the notes:

Accounts Receivable - Assigned xx
Less: Note Payable - Bank (xx)
Equity in assigned accounts xx

Factoring of Accounts Receivable

- sale of accounts receivable on a without recourse, notification basis
- the entity sells accounts receivable to a bank or finance entity called Factor
- the entity transfers ownership of the accounts receivable to the Factor compare to assignment where the entity still
retains ownership of the accounts receivable

Types of Factoring Accounts Receivable

1. Casual
Journal Entry
Cash xx
Allowance for doubtful accounts xx
Loss on factoring xx
Accounts receivable xx

2. Factoring as a continuing agreement

Journal Entry
Cash xx
Commission expense xx Factoring fee for credit approval
Receivable from factor xx Factor’s Holdback - Usually to cover sales return and allowances
Accounts receivable xx
Discounting of Notes Receivable (Note is Negotiable)
Parties involved in Discounting Notes Receivable
1. Maker - the one liable to pay the Payee (Notes Payable is the account in his Balance Sheet)
2. Payee - the one entitled to receive the payment from Maker (Notes Receivable is the account in his Balance Sheet)
3. Endorser - the Payee who endorses the Notes Receivable to bank or finance company
4. Endorsee - the bank or finance company

Types of Endorsement
1. With Recourse - the endorser shall pay the endorsee if the maker dishonors the note (refuses to pay the endorsee)
- there is a contingent liability or secondary liability for the endorser

2. Without Recourse - endorser avoids future liability if the maker refuses to the endorsee on the maturity date

In the absence of any evidence to the contrary, endorsement is assumed to be with recourse.

Computations
Maturity Value xx (Principal + Interest)
Less: Discount (xx) (Maturity Value x Discount Rate x Discount Period)
Net Proceeds xx

Interest = Principal x Interest Rate x Term of the Note

Discount Period = Term of the Note – Expired Period

- also the unexpired period

Compare Net Proceeds vs Carrying Amount of Note (Principal + Accrued Interest)

- If Carrying Amount of Note is higher, there is loss on discounting (usually the case)
- If Net Proceeds is higher, there is gain on discounting

Journal Entry if Discounting is Without Recourse (with loss on discounting)

Cash xx
Loss on note receivable discounting xx
Notes receivable xx
Interest income xx

Journal Entry if Discounting is With Recourse

1. Conditional Sale (with loss on discounting)
Cash xx
Loss on note receivable discounting xx
Notes receivable discounted xx
Interest income xx

The account Note Receivable Discounted is deducted from the total notes receivable when preparing the statement of
financial position with disclosure of the contingent liability.

When the maker paid the endorsee on maturity date (to extinguish the contingent liability)
Note receivable discounted xx
Note receivable xx

When the maker did not pay (dishonors the note) the endorsee on maturity date
Accounts receivable xx To pay the endorsee (bank or finance company)
Cash xx

Note receivable discounted xx To cancel the contingent liability

Note receivable xx

2. Secured Borrowing (no gain or loss on discounting)

Cash xx
Interest expense xx
Liability for note receivable discounted xx
Interest income xx
When the maker paid the endorsee on maturity date (to extinguish the contingent liability)
Liability for note receivable discounted xx
Note receivable xx

When the maker did not pay (dishonors the note) the endorsee on maturity date
Accounts receivable xx To pay the endorsee (bank or finance company)
Cash xx

Liability for note receivable discounted xx To cancel the contingent liability

Note receivable xx