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FINANCIAL ACCOUNTING AND REPORTING

RECEIVABLE FINANCING

Accelerating the collection of receivables either by using accounts receivable as a loan collateral,
selling the receivables without recourse and discounting of notes receivable.

The use of receivables as a loan collateral can either be an designated as a pledging of accounts
receivable or an assignment of accounts receivables.

Pledging Assignment

Total or all of the accounts receivable is A specific portion or specific accounts

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 are used a collateral. Not all
of the accounts receivable balance.
A reclassification is made on the
assigned accounts.
Disclosure on the equity on the
assigned accounts or of the assignor is
disclosed in the notes.
The equity in the assigned accounts is
the difference between the balance of
the assigned accounts and the balance
of the loan.

The absolute sale of receivables is known as factoring and can be either a casual factoring
transaction or factoring as a continuing agreement.

Casual factoring is 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:

Face value of AR X
Less: Service fee or commissions X
Selling price X
Less: Accounts receivable X
Allowances X X
Loss on factoring X

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. In other words, the collection and credit
responsibilities are surrendered to the buyer as soon as goods are delivered to the customers.
The following items shall be deducted from the face value of the receivables:

Face value of AR X
Less: Service fee or commissions X
Interest charges X
Factors holdback X X
Proceeds from factoring X

Both the service fee and interest shall be recognized as an expense, meanwhile the factors
holdback is a receivable and a value where the factor shall deduct the sales discounts and sales
returns taken by the sellers customers before finally remitting to the seller the balance when all of
the accounts receivable is collected.

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Discounting of notes receivable that is with recourse and on a notification basis shall involve the
following computation:

Face value or principal X

Interest on maturity X
Maturity value X
Less: Discount (MV x DR x remaining term) X
Proceeds from discounting X

The discount rate shall be determined by the bank buying the note, however if there is no discount
rate provided, the same rate on the note shall be used as the discount rate. The remaining term is
also known as the discount period.
The total receivable shall also be computed on the date of the discounting which is the face value
plus the accrued interest from the date of the note. This amount shall then be compared with the
proceeds of the discounting and a loss shall be recognized for the difference.
The entry for the discounting shall be as follows:

Cash Xx
Loss on discounting Xx
Notes receivable discounted xx
Interest income or interest receivable xx

The note receivable discounted account is credited rather than writing off the notes receivable
account because of the contingent liability feature of the discounting transaction. However, this
account shall be a contra-asset account and deducted from the total notes receivable to be
presented in the statement of financial position.

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