This stems from CFAI Vol. 2 page 361 questions 16 and 17. When you securitize receivables and sell them to a special purpose entity, why do the total assets of the firm increase by the amount of the securitization? Isn’t it reasonable to assume that you sell the receivables for cash, which means total assets stay the same? And to account for it, you transfer the amount of the sale from equity to liabilities?
You are correct. But it is asked in the question that what if you HOLD them on the balance sheet instead of SELLING them? That means you did receive the cash from selling them, but you are still showing the receivables on the balance sheet. That is why the increase by the amount of securitization.
i have the same question as job71188!!
not sure here, but I think you are suppose to increase cash by the amount received, however, you also increase liability by the amount received while receivables remains unchanged, from their view point since the firm is still responsible for the receivables, it shouldn’t get written off
ah, okay. thanks a lot, cfagoal2.
Yes I emailed CFAI a while ago and they confirmed what cfagoal2 said. Basically, treat the receivables as if they never left and consider you getting a loan. Liabilities increase by the same amount as cash.