Securitizing A/R

CFA Level II
#1

Is the balance sheet effect from securitizing A/R an increase in cash and an increase in liabilities? What is the liability that increases?

#2

Account receivables (Current Assets) are up and LT Liabilities are up as a balance to the equation. Cash in CF statement goes down. It’s economically equivalent to collateralized borrowing.

#3

Great, thanks.

#4

SWG: If Current Assets increase - why do LT Liabs have to increase? That seems kind of counterintuitive.

#5

cpk123 Wrote: ------------------------------------------------------- > SWG: If Current Assets increase - why do LT Liabs > have to increase? That seems kind of > counterintuitive. I agree–I’m seeing an increase in CL…

#6

Because it’s a sale of receivable with recourse, so the seller has the obligation/liability to collect the receivables and pass it on the party whom they sold the ARs too, no? You know better. Plz correct if my understanding is way off.

#7

ohh was the confusion between increasing LT Liabilities or Current Liabilities? I think it has to be current liabilities.

#8

It is an increase in current liabilities since the liability is expected to be due within that operating period, or so the assumption goes. A sale with recourse is like short-term borrowing - we monetize our accounts receivables early with a ‘loan’ from a financial entity. Because we continue to bear the risk of the receivables (i.e. with recourse), it would not make economic sense to “pretty up” the B/S by removing its full amount

#9

Yes, but A/R’s are usually due within a relatively short time period–therefore, an increase in CL.

#10

Thanks for the clarification guys. FSA Synthesis is by far the most ridiculous topic.

#11

But it is also the best. When you find an airline company that has way more debt than it’s supposed to because of off-balance sheet leases, you can tell your friends how wrong D/E ratio is on Yahoo Finance. They will then revere you for being intelligent and will give you money. From there, you can start your own Ponzi Scheme (Mindinsky or whatever his name is - third stage) whereby your investments are reverse amortizing loans. Let that new bubble fly baby

#12

I believe the exact ledger account is ‘Loans Payable’, which would be a current liability.