CFAi Reading 24 Elimination of QSPE, liability.

CFA Level II FRA
#1

QSPE, why do we touch our liability when consolidating the account receivable back to the parent company ?

Here is what I understand:

While securitizing to a QSPE was allowed, firms reporting under US GAAP, would sell their Account Receivable in exchange for Cash.

So,

  1. Act receivable decrease by the amount securitized

  2. Cash increases by the amount determined in the securitization agreement between the parent and its QSPE

As US GAAP no longer allows such as practice, securitized act receivables need to be consolidated back to the parent’s Balance Sheet. Consequently:

  • decrease cash

  • increase act receivable

  • BUT increase by the same amount the liability side (I cannot remember why),

I don’t understand why we have to deal with liabilty here , are we taking some form of debt to buy it back. Do you know why liabilty goes back up?

I am sure there is a simple explanation, but I am stucked on that one…

help :slight_smile:

#2

why do you decrease cash when consolidating? Your bank balance is still the same.

You increase accounts receivable (to offset the initial entry)

You add to your liabilities to reflect that its still an obligation for the parent.

#3

#next_pages_container { width: 5px; hight: 5px; position: absolute; top: -100px; left: -100px; z-index: 2147483647 !important; } Thanks Cinderalla,

For some reasons I mistakefully thougth that we were reversing the trade for both cash and act receivable. So if I understand correctly the cash we received from securitizing our account receivable is untouched, we just get the account receivable back (increase in asset) and thus balance with the associated liabilty that had previously been accounted for as being sold.

#4

Yeah the cash is untouched. It must however be reclasssfied as CFF instead of CFO.

#5

thanks :slight_smile:

#6

PhilMtx, in terms of the final balance sheet effect, this is identical to what happens when a company securitizes, but is not able to derecognise the receivable: cash from the sale appears, the receivable stays within assets (as it cannot be dercognised) and you need a liability to make the balance sheet balance. There is a nice example of this in you FRA book on pg. 151 - 2nd to last sentence of the extensive quote from FIAT’s annual report.

#7

thanks