Securitizing Accounts Receivable

CFA Level II FRA
#1

How should Securitizing Accounts Receivable be accounted for?

If a company securitizes $200,000 worth of accounts receivable (to an SPE), which of the following is most likely correct? Assume the income tax rate is at 40%, and assume there is zero tax on the sale of accounts receivable to the SPE.

A. Assets decrease by $120,000 and Equity decreases by $120,000.

B. Assets decrease by $200,000 and Liabilities decrease by $200,000.

C. No effect on the Total Assets, since an equal amount of cash ($200,000) is recorded, offsetting the decrease in accounts receivable.

Please post your choice and EXPLANATION. Don’t necessarily believe in your first instinct on this one!

Once you’ve answered this question, go to curriculum Volume 2 Page 463 and look at Question 17.

Good luck with the exam!

#2

C?

#3

It depends on whether or not you are required to consolidate them - if they can treat it as a sale or not (GAAP can still do either)

If a true sale, in GAAP, the liabilities and assets are both removed and any gain between carrying value and market value of the assets are in IS, and the answer would be B.

If not a true sale, they are required to consolidate and the answer would be C.

In IFRS, sales are pretty much eliminated (correct me if I’m wrong)

The question in the book assumes that they HAD been sold and ARENT reflected on the balance sheets as given. So, the question is assuming that the situation in B has already happened

#4

if the company still is responsible for losses they will have to keep the A/R on their books.