What is the difference between selling receivables with recourse and selling receivables without recourse? How does it impact the accounting for this transaction?

market rate

The transferred assets, or similar assets, therefore must be readily obtainable. If assets were not readily obtainable, then the transferee would be constrained by the call option, would not be able to sell the assets, and would not effectively control the assets. Thus an agreement allowing the transferor to repurchase such assets would effectively maintain control with the transferor. Horton Corporation is preparing a bank reconciliation and has identified the following potential reconciling items.


The massachusetts state income tax « discount » is used because the bank deducts the interest it charges from the note’s maturity value and thus discounts the note. Additionally, the rate depends on whether it is recourse factoring or non-recourse factoring. In the future, securitized products are likely to become simpler. After years of posting virtually no capital reserves against high-risk securitized debt, SPEs will soon be faced with regulatory changes that will require higher capital charges and more comprehensive valuations. Reviving securitization transactions and restoring investor confidence might also require SPEs to retain an interest in the performance of securitized assets at each level of risk .

What is quotrecoursequot as it relates to selling receivables a

To record settlement of factoring agreement.It is important to note that the type of factoring influences the amount of fee charged and the amount of security held by the factor. The scenario in this example is only for the purpose of comparing the two types. The amount of security retained may be zero under factoring with recourse because the agreement guarantees the factor that any debts that may turn out to be irrecoverable will be reimbursed.

Factor Definition: Requirements, Benefits, and Example – Investopedia

Factor Definition: Requirements, Benefits, and Example.

Posted: Sun, 26 Mar 2017 03:48:55 GMT [source]

Notes receivable can arise due to loans, advances to employees, or from higher-risk customers who need to extend the payment period of an outstanding account receivable. Notes can also be used for sales of property, plant, and equipment or for exchanges of long-term assets. Notes arising from loans usually identify collateral security in the form of assets of the borrower that the lender can seize if the note is not paid at the maturity date.

Step-by-step explanation

If the maker pays the bank, the contingent liability will end; if the maker defaults, the contingent liability will become a real liability. In transfer without recourse, the factor takes on all the risk of uncollectible receivables. The company that transferred receivables has no liability for uncollectible receivables. In transfer with recourse, the factor can demand money back from the company that transferred receivables if it cannot collect from customers. Securitization is inherently complex, yet it has grown exponentially. This is because both the investment return and losses are allocated among the various bundles according to their level of risk.

There are advantages and disadvantages of both recourse and non-recourse factoring. In general, companies with creditworthy customers and strong balance sheets face less risk regardless of whether they choose recourse or non-recourse factoring. Every business is unique as far as dealing with collecting from customers. It is important to consider the benefits and drawbacks of both recourse and non-recourse when factoring your invoices to decide which will better meet your business needs.


A seller misrepresented a property with a sub sewage treatment system. AR factoring is much simpler and transparent compared to taking loans. If a user or application submits more than 10 requests per second, further requests from the IP address may be limited for a brief period. Once the rate of requests has dropped below the threshold for 10 minutes, the user may resume accessing content on SEC.gov. This SEC practice is designed to limit excessive automated searches on SEC.gov and is not intended or expected to impact individuals browsing the SEC.gov website. However, the transferee must be in a position to fulfill the option, if it is exercised.

Question: What are the two types of factoring?

This account balance can be shown in the balance sheet as a deduction from all notes receivable. One of the differences between notes receivable and accounts receivable is the greater negotiability of notes. The buyer (called the “factor”) collects payment on the receivables from the company’s customers. If the conditions for either IFRS or ASPE are not met, the receivables remain in the accounts and the transaction is treated as a secured borrowing with the receivables as security for the loan. The accounting treatment regarding the sale of receivables using either standard is a complex topic; the discussion in this section is intended as a basic overview.

Receivables Finance – Fraud Risk and How to Deal with it Effectively – Lexology

Receivables Finance – Fraud Risk and How to Deal with it Effectively.

Posted: Mon, 08 Mar 2021 08:00:00 GMT [source]

After the initial assessment, a customer’s payment history will affect whether their credit limit will change or be revoked. In a notification deal, the borrower’s buyer would be notified of the transaction, meaning that the company’s payable team would be contacted with new payment instructions by the factoring company. In a non-notification deal, the buyer is completely unaware of the vendor’s financing arrangement with the factoring company. While subject to annual reviews and margining requirements, a bank operating line is usually extended to revolve on an ongoing basis, as long as the lender can remain comfortable with the borrower’s risk profile. A/R factoring exposure generally only lasts as long as the vendor’s payment terms with its buyer (usually days). Accounts receivable factoring is a source of debt financing available to businesses that sell on credit terms.

Lends against the accounts receivable using them as collateral to advance funds. Typically recourse factoring requires the personal guarantee of management or the owners because the owners must maintain liquidity to purchase back any non-performing accounts receivable taken as collateral by the Factor. The company is still ultimately liable for the invoices if they remain unpaid past their due date.

A non-notification loan is a full-recourse loan that is securitized by accounts receivable . Typically, a percentage of the receivable amount is kept by the factor; however, that percentage can vary, depending on the creditworthiness of the customers paying the receivables. Notes payable are debts a business owes to another company, usually a supplier or vendor. This means that the company discounting the note, known as the endorser, guarantees the eventual full payment of its maturity value. Credit risk—the risk that one party to a financial instrument will default on its debt obligation. This type of a transfer is considered to be an outright sale of the receivables.

They are often used to avoid frequent changes in catalogs or to quote different prices for different prices for different quantities purchased. Cash discounts are offered as an inducement for prompt payment. The original holder of the accounts receivables in pledging is called the pledge and the company providing the cash is called the pledgee. If the pledge defaults on the loan, the pledge has the right to use the receivables for payment.

journal entry

This method also illustrates proper matching of expenses with revenues earned over that reporting period. Remember, just use credit sales, watch for any indication of cash sales. The sum of all the estimated uncollectible amounts by group represents the total estimated uncollectible accounts. Just like the percentage of accounts receivable method previously discussed, the estimated amount of uncollectible accounts using this method is to be equal to the ending balance of the AFDA account .

What Does Accounts Receivable Insurance Cover?

Nor does an option held by the transferor to repurchase the receivables necessarily require recording the transfer as a loan. For most receivables the amount of money to be received and the due date can be reasonably determined. Accountants thus are faced with a relatively certain future inflow of cash and the problem is to determine the net amount of this inflow. Return privileges are frequently part of a comprehensive marketing program required to maintain competitiveness. Sales returns are unacceptable merchandise taken back; sales allowance are price reductions made to encourage customers to keep merchandise not meeting their preference or having minor damage. Agincourt Inc. recently had to pay 8% interest for money that it borrowed from British National Bank.

  • Many companies in the U.S. are thorough when it comes to protecting against losses related to property damage, liability, and other unpredictable, high-exposure risks.
  • For each method above, management estimates a percentage that will represent the likelihood of collectability.
  • This, in turn, can boost the revenue of the business, through which businesses can build up a working capital reserve for future growth.
  • Catalogues are expensive to publish, so this is only done from time to time.

An assignment of accounts receivable requires the assignor to assign the rights to specific receivables. Frequently, the assignor and the finance company enter into a long-term agreement whereby the assignor receives cash from the finance company as sales are made. The accounts are assigned with recourse; the assignee has the right to seek payment from the specific receivables. A non-recourse factoring arrangement generally constitutes an ordinary sale of receivables because the factor has no recourse against the transferor for uncollectibles accounts.

Merchant Cash Advance Redux: Loan vs True Sale – New York … – Lexology

Merchant Cash Advance Redux: Loan vs True Sale – New York ….

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Notes with stated rates below the market rates or zero- or non-interest-bearing notes may or may not have a stated rate of interest. However, there is always an interest component embedded in the note, and that amount will be equal to the difference between the amount that was borrowed and the amount that will be repaid. This section of the chapter is intended to be a summary overview of the methods and entries used to estimate and write-off uncollectible accounts originally covered in detail in the introductory accounting course. Students may wish to review those learning concepts from that course.

This amount is recorded as a receivable on the seller’s books. Sales discount forfeited, a revenue account, is similar to interest revenue. The net method specifically identifies discounts forfeited by customers. Regardless of the payment date, the net method reports sales and receivable at the net amount, the amount acceptable to the seller for compute payment.


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