I am a bit confused with the topic of sale of receivables. When a company sells receivables, the adjustments an analyst should make are: adding back the receivables to current assets, as well as add a liability? 1. I understand a liability has to be added in order to balance the balance sheet, but what exactly is the liability created? And how does it affect interest expense?
Jamms the adjustment are made only if the company sells receivables (usually discounted) with recourse threating them as an off-balance sheet financing technique . That means the company discounting the note agrees to pay the financial institution if the maker dishonors the note. When notes receivable are sold with recourse, the company has a contingent liability that must be disclosed in the notes accompanying the financial statements. A contingent liability is an obligation to pay an amount in the future, if and when an uncertain event occurs. Under US GAAP, a sale of receivables with recourse can be accounted as a true sales of receivables only if the following condition are met: - The sold receivables are isolated from the other receivables still owned by the seller. - The seller surrenders control over the receivables to the buyer - The buyer can pledge or sell the receivables
Strangedays, I’m still a bit confused. Say you have $1000 of Accounts receivable that you sell at recourse for a discount of $990. Assets: A.R originally goes down $1000 Cash goes up $990 Liabilities: ??? What happens to the accounts above? and how is interest expense treated?