If a firm sells AR to a QSPE the firm’s AR decreases and cash increases right?
QSPE’s are not allowed under US GAAP. Depending on whether or not the receivables were sold with recourse, the seller may have to treat it as a collateralized borrowing.
SCHWESER EXAM 3 AM. Just read that in the notes thanks - but I am trying to get my head round this question: If the FASB were to retroactively eliiminate the allowance of QSPEs created for securitisation of receivables, the most likely impact on Kronker’s Financial Statements would be: an increase in Eq and increase in int expense no change in assets but an increase in financial leverage an increase in financial leverage ratios and a decrease in the interest coverage ratio Answer is C. Can someone PLEASE explain
My thinking here is if they eliminate QSPE’s then AR will be higher and cash lower.
Financial Leverage = Total Assets / Equity Interest Coverage = EBIT/Int Expense AR was initially sold with recourse. Now effect of that is being reversed since the QSPE transaction is no longer valid. How is that done? AR is increased back. So assets went up. Liabs is increased - since the amount obtained due to sale of the AR in the first place is now treated as a collaterized borrowing (a Loan). A and L both went up by the same amounts, so no change in Equity. A/E -> has gone up as a result. You are now paying interest on the loan. So Interest Expense went up. So EBIT/Int went DOWN. Choice C.
thanks a lot!