I am not able to understand hw exactly the sale of receivables with recourse works… Can any1 elaborate on dis…?? Thanx…
The receivables are sold to a 3rd party. For instance you have US$3000 debtors, you can sale these to a 3rd party (e.g. factoring) for US$2,700 with recourse. What it means is that you receive cash and the receivables (debtors) disappear (Debit Cash, Credit Receivable) from your books. However if they are sold with recourse during financial analysis or note to the accounts you treat the receivables as still existing and the 3rd party who took over them as a creditor (accounts payable) since if he fails to liquidate them he will revert to you (right of recourse). Sorry I was a bit verbose. Did this help?
Plain and simple sale of recievables with recourse means if the party purchasing the recievables doesnt get paid, they can come after you.
This is called “Securitization of Receivables” or AR. Ideally, a co wants to sell AR to a 3rd party without recourse because there is no way that the 3rd party can knock on your door for non payment from one of the co’s. An analyst can find this info in the footnotes and if the sale of the credit risk is done with recourse, as in this case, the analyst should reverse the transaction and decrease cash and increase AR (basically reversing what the sale did) because this sale is not a sustainable increase in cash. This transaction should be be treated like a loan (ie increase in debt). If it was without recourse then there would not be an increase in debt and the increase in cash and decrease in AR would stand alone on its own merit. This activity might warrant a closer analysis of the co’s liquidity.