FRA page 182 Quest 24

company plans to sell 100million receivables to SPE How would consolidated Balance sheet look? Answer is: both will show the same Account receivable. I agree. Why A is not correct? A says Cash balance will be higher. Wouldn’t it be higher? here is my attemt of reasoning: Maybe cash balance = CFO+CFI+CFF CFO may increase by 100million, but CFF would be (100)million, so cash balance would be the same.

There was once a topic about this question, the replies didn’t answer why the choice “cash balance will be higher” is wrong.

I don’t have the book with me but here’s my attempt. It sounds like you have to consolidate the SPE and not use the Equity method. I can’t remember exactly but I think that the SPE is created for the following reason: The SPE will take out a loan that is collateralized by the A/R that parent is “selling”. The SPE is getting a more favorable loan that parent because its a SPE (and not subject to creditors like parent is, in bankruptcy even a collaterilized loan can lose value). So the SPE is created becuase the bank will loan money more favorably to SPE. The cash from the loan is then used to purchase A/R from parent. The SPE is 100% owned by parent likely in this case. Therefore you need to use the consolidation method. So here is how it works. Lets say A has SPE “B” IF its 100% consolidated, A sells A/R to B. A’s cash increases B’s cash decreases Consolidate nets to zero. A/R A’s decreased B’s increases (asset) Nets to zero Easiest way to think about it. Usually when A/R is sold to an SPE, its purely done for favorable loan treatment for the “cash” that is received for the A/R. Since its done mostly for legal reasons, their consolidated B/S should not change. IF they sell it to an unrelated third party, you are absolutely correct. Cash increase A/R decreases.

makes sense! thank you for the detailed answer. much appretiated