RECEIVABLE FINANCING

I. INTRODUCTION TO RECEIVABLE FINANCING

Receivables on their own can not be used directly as a payment for purchases of goods and other assets, nor an be used as payment for liabilities. As a result, the entity has to wait for their customers to pay in order to use such amount.
However, there are circumstances such as decrease of sales or cashflows, increase of expenses or liabilities, long collection period, slow-paying customers, and low cash to pay maturing obligations, may occur. This would result for the entity to fast-track the realization of their
receivables into cash by entering into any of the following receivables financing methods:

METHODS OF RECEIVABLE FINANCING

RECEIVABLES AS SECURITY SELLING OF RECEIVABLES

Receivables are sold or transferred to other entities
Receivables serve as mere collateral for the entity’s borrowing of funds
FACTORING OF ACCOUNTS RECEIVABLE DISCOUNTING NOTES RECEIVABLE
PLEDGING OF ACCOUNTS ASSIGNMENT OF ACCOUNTS RECEIVABLES In factoring transactions, the entity sells its receivables to a factor which is usually a
Every note receivable has a stated maturity and the entity needs to
RECEIVABLE bank, a lending company, or other financial institution, who will collect the receivables
wait until maturity date to receive note’s maturity value. However, tight
In an assignment transaction, the entity assigning its receivables is from the customers. Factoring is usually done on a notification basis and either on a
cash positions may compel an entity to look for way to turn notes
Pledging of receivables called the assignor while the bank or other financial institution who without recourse of with recourse basis.
receivables into cash even before the maturity date. This is when the
lends to the entity is called the assignee.
involve the borrowing of funds discounting of notes receivable comes into help the entity manage its
There is only a specific amount of receivables that are used as a There are two types of factoring transaction as to frequency:
from a financial institution, with cash flows.
collateral in borrowing of funds of the entity from a financial institution. a. Casual Factoring; one-time or irregular factoring of receivables only when he end
the general balance (total or In this kind of receivable financing, we deal with notes
This means that only a portion of receivables are used as collateral and for extra cash arises.
100% balance) of accounts receivable. Notes receivable are being negotiated or sold by the entity
not the receivables general amount. Thus, the lender may only hold such
to banks or other financial institutions. Thus, this results for the maker
receivables serving as the receivables if the borrower defaults. b. Regular Factoring Agreement; All of the entity’s accounts receivables are
of the notes to redirect its payment to the bank, who will acquire all the
collateral. Thus, in case of It is a formal form of pledge wherein the receivables assigned or regularly factored, instead of waiting for customers to pay their accounts.
risks and rewards as it purchase the notes receivable, at the date of
incapability of the entity to repay used as collateral security for borrowing are specifically identified and
maturity of the notes receivable.
the loan, the creditor has the right stated in the loan contract. It is also supported by a promissory note. There are two type of factoring transactions as to entity’s liability: The holder of the note endorses the note to a bank in exchange for a
to collect the pledged receivables Same as pledging, there is no derecognition in assignment because
cash equal to the the maturity value of the note less a discount. At the
the assignor/borrower retains control over the assigned a. Factoring without recourse
asa payments for the loans maturity, the bank collects the maturity value of the note from the
receivables.However, an entry is needed to specifically identify the The factor assumes the risk of uncollectability and absorbs any credit losses. The
payable. maker.
assigned receivables from other receivables through the use of the transferor is not held liable in case the debtor fails to pay as there is an absolute transfer Notes may be discounted on a without recourse, which then has
“ Receivables-assigned account. ” This journal entry is called as of ownership. It is an outright sale or ordinary sale of receivable, both in form (transfer
The following are the 2 types (conditional sale and secured borrowing) or with recourse
“Reclassification”. or title) and substance (transfer of control). This is qualified for derecognition as it is basis.
accounting procedures when Together with he reclassification entry of the assigned accounts treated as sale not as a secured borrowing.
there is a pledge of receivables: receivable, there is also a need to enter a disclosure in the notes of ACCOUNTING OF DISCOUNTED NOTES PAYABLE
* The pledged receivables financial statements regarding the “Equity in assigned receivables or b. Factoring with recourse Regardless of the type of discounting of notes receivable, the
shall not be derecognized accounts” which is equal to: When a receivable are factored on a with recourse basis, the transferor guarantees discounted receivables are initially accounted as follows:
because of the pledge as there is payment to the factor, held liable up to the guaranteed amount, in the event that the 1. Get the net proceeds of the discounted receivables. Use the
no transfer of ownership in AR-assigned less Face amount of Note or Loan Payable debtor fails to pay. There is a transfer of financial asset wherein the transferor neither formula below:
transfer nor retains substantially all the risks and rewards of ownership of the financial
pledging because the
Assigned receivables shall still be presented in the statement of asset. Thus, the transferor has a continuing involvement with the receivable. Maturity value of notes receivable
pledgor/borrower retains control financial position as regular receivables, or as part of “trade and other
over the pledged receivables. - amount of discount
receivables”. However, a disclosure to notes to financial statement shall ACCOUNTING OF FACTORED RECEIVABLES = Net Proceeds from discounting of notes receivable
Thus, there is no any journal be made regarding the assigned receivables Regardless of being casual, regular, with or without recourse, the factored receivables
entry to be made in pledging. are initially accounted as follows: where;
Under pledging, there is no INITIAL ACCOUNTING OF ASSIGNMENT OF RECEIVABLES 1. Get the net proceeds of the factored receivables. Use the formula below:
specific receivables identified in The main concern in the initial accounting of assignment of accounts Maturity Value of the note receivable = Principal + Total Interest
the loan contract as collateral receivables are: Balance of factored receivables Total Interest = Principal x stated rate x time
security, the lender may hold the -Factor’s holdback
a. Journal entry to record the receipt of net proceed from the -factoring charge Take note that in non-interest bearing notes receivable, the face amount
borrower’s general receivables as
assignment -financing charge of the notes already includes the interest. Thus, the face amount of the
collateral security when the To get the net proceeds from the assignment, this should be followed: = net proceeds from the factored receivables
borrower defaults. non-interest bearing notes receivable is its maturity value.
Total amount of assigned receivables
Derecognition means the x Percentage to be lent Factor’s Holdback Amount of Discount = Maturity value x discount rate x discount
elimination of the previously Gross proceeds from the assignment There are times when the receivables are being deducted by doubtful accounts, sales period
recognized asset or liability from - service charge, if there is any returns, and sales discount. The factor think of such circumstances too. If he would buy Discount period is the remaining period to maturity date of the note as
an entity's records. Despite this Net Proceeds from the assignment the factored receivables, there are chances that he will not get the total factored of date of discounting. It is the unexpired term of the notes.
non-derecognition, the existence receivables he acquired which make him earn loss in such transaction. Thus, to give Discount rate is the rate at which the note is discounted with a bank.
of pledged receivables shall be To give allowance for any doubtful accounts, the bank or the lender will allowance for any occurrence of these things, the factor have holdbacks.
disclosed in the notes to give a “ percentage to be lent ” which will be applied to the total 2. Make the initial journal entry or the discounting transaction
assigned receivables given. Also, it will account for any sales returns, The transferor is responsible for any reduction in the collection of the receivables due to The initial journal entry concerning the discounting will vary
financial statements. sales returns and discounts wether the factoring is with recourse or without recourse
sales discounts, sales allowances, as well as any advance interest depending on wether the discount is with recourse or without
In summary, pledged payment if there is any. All of these are to be accounted by the bank, basis. Factor ’ s holdback is a portion in the factored receivables which represents an recourse. If such notes is with recourse, the journal entries will again
receivables are neither creditor, or financial institutions. All of this may decrease the amount of amount that the factor does not pay the selling entity yet. The factor retains such vary depending on wether the recourse arises from conditional sale or
derecognized nor specifically the loans to be given to the assignor. percentage of the transferred receivables to serve as cushion. This opens an account secured borrowing.
identified from other receivables. receivable from the factor, which is recorded under the account “Factor’s Holdback ”
* The borrowed funds shall To journalize the receipt of the nett proceed from the loan: or “Receivable from factor”, to the record of the selling entity. On the other side, the DISCOUNTED WITHOUT RECOURSE
be recognized as a separate Cash factor open a liability account or an account payable to the transferor in its record. If the note is discounted on a without recourse basis, the holder is not
liability. Service Charge, if any When the factor has successfully received all of the factored receivables, the factor is held liable in case the maker fails to pay. The note discounted has
* No gain or loss is Other expense, if any obligated to pay its payable (which is the factor’s holdback remaining balance), to the essentially been sold outright and, therefore, derecognized.
Loan Payable selling entity.
recognized.
* Interest income (if there is Cash
b. Journalize the reclassification or segregation of the assigned Loss on factoring Loss on discounting, if any
any) from receivables is receivables The factor may charge the transferor a factoring charge or commission, and even Notes Receivable
separately recognized from Accounts Receivable - assigned require the selling entity to pay for a computed interest which will pay the days that the Interest Income
interest expense (if there is any) Accounts Receivable factor has to wait to completely receive all the factored receivables, the are called the Gain on discounting, if any
from the borrowed funds. loss on factoring. Since the selling entity has no cash to cover such expenses, the factor
SUBSEQUENT ACCOUNTING OF ASSIGNMENT OF will deduct these expenses, and also the factor’s holdbacks, from the gross proceeds of Notes receivable is credited because the entity is not liable in case the
JOURNAL ENTRIES RECEIVABLES the factored receivables which will result to net proceeds which is the total cash which maker did not pay the notes.
INVOLVED IN PLEDGING: The subsequent accounting of assignment of receivables depends the selling entity will get from the factoring transaction. Interest income is computed from the date of the issuance of the note
on whether the assignment is made on: up to the date of discounting.
a. Sale of goods to customers on 2. Make an initial journal entry regarding the factoring transactions. The amount of gain or loss on discounting is a squeeze amount. Most
NOTIFICATION BASIS NON- NOTIFICATION BASIS of the time, there is a loss on discounting since the discount rate is
credit Customers or debtors are debtors whose receivables have been Casual Factoring Regular Factoring almost always higher than the stated rate.
informed that their assigned are not notified of the The transferor should record the service fees and
The transferor should
Accounts Receivable accounts have been assignment. Thus, they will continue interest charges as regular expenses; commission
record the service fees The accounting for discounting on notes receivable without recourse
Sales assigned and that they to pay to the assignor which lets the expenses, interest expense, service charge, and etc.
and interest charges as ends here since the entity is no more involved in the notes as well as
shall remit their payments assignor to have a real-time “ loss on sale of the bank.
to the assignee. recording of payment as well as the
b. Borrowing of funds of the The assignee will receivable or loss on
returns, discounts, and doubtful With recourse W/O recourse
entity periodically (usually every a.Initial Entry
accounts. factoring”. a. Initial Entry DISCOUNTED WITH RECOURSE
month) inform the Cash
Cash Receivable from factor
assignor of the collections a. Without recourse Factoring fee CONDITIONAL SALE SECURED BORROWING
Loans Payable of the assigned receivables Interest Exp. Cash
Cash Loss from recourse Receivable
as well as the Cash
corresponding discount, Loss on sale of rec. liability from factor Loss on discounting. if any Cash
Plus; Disclosure of the pledged A/R Interest Expense, if any
returns, and doubtful Receivable from factor RecourseLiability Factoring fee N/R- discounted
accounts receivables in the a. Receipt of payments from Interest Exp. Interest Income Loan Payable
accounts arising from the A/R
notes to financial statements customers or debtor Loss or cost on factoring A/R Gain on discounting, if any
assigned receivables. Interest Income
Cash includes loss from recourse
Sales discount, if any Loss or cost on liability Loss or cost on Almost similar to discounting
“The accounts receivable in a. Receipt of payments factoring is
A.R - assigned factoring or sale of without recourse except for
the amount of XXX are pledged from customers or b. Use of factor equal to the NR- discounted account Since the note receivable is just
receivables is squeezed. holdback
to the borrowing of funds to BPI” debtor factoring fee credited. It is a contingent a collateral, it is not
b. Recording of write-off of Allow. for Bad debts
Sales Returns liability and presented as a
assigned accounts b. with recourse plus deduction from notes derecognized. Instead, a
c. Interest Income from the No real-time recording Receivable from factor
Allow. for bad debts interest expense receivable accounts. separate liability will be
pledged receivables A.R - assigned c1. Default of customer recognized.
Cash
(lower than expected) and Interest income is computed
b. Recording of write-off Receivable from factor settlement of recourse liab b. Use of factor
Cash or Interest Receivables c. Recording of sales Recourse Liab from the date of the issuance
of assigned accounts Loss on sale of rec. holdback of the note up to the date of The suppose loss or gain on
Interest Income returns/allowances Cash
Sales return/allow. A/R (settle the discounting. discounting is reported as
No real-time recording A.R - assigned Liability for recourse recourse liability) Allow. for The amount of gain or loss on interest expense or interest
d. Receipt of accounts A/R Bad debts discounting is a squeeze income, respectively. It is also a
obligation AFDA
receivable c. Recording of sales amount. Most of the time,
d. Periodic application of (reinstate A/R Sales Returns there is a loss on discounting squeezed amount.
returns/allowances collections as payment of back to books) Receivable
Loss or cost on since the discount rate is
Cash borrowing (usually at end of each from factor almost always higher than the
No real-time recording factoring or sale of d1. Settlement of recourse
Accounts Receivable month) liability stated rate.
receivables is squeezed.
Recourse Liability c. Settlement of
Also, in pledging of receivables, d. Periodic application of Loans Payable Gain from recourse
collections as payment of Liability factor’s 3. Enter subsequent journal entries for discounted notes
any receipt of receivables are not Cash
borrowing (usually at not yet finished holdback receivable, with recourse
used to pay the liability. The c2. Recourse liability is SECURED BORROWING
end of each month) Interest Expense used up full amount
lender will only have access to Recourse Liab Cash CONDITIONAL SALE a. Payment of notes receivable
Cash Cash a. Payment of maker of notes by maker
the accounts receivable when the Loans Payable
entity fails to pay the loan. Sales discount A/R receivable
AFDA Receivable Loan Payable
Sales return/allow. Notes receivable - discounted Notes Receivable
no settlement of recourse from Notes receivable
e. Payment of interest expense Allow. for bad debts
A.R - assigned liability is made sine it is factor
due to the loans payable Interest expense is based on the used in full amount b. The maker failed to pay b The maker failed to pay
beginning-of-the-period loan
Interest expense 3. Settlement of NR -discounted Loans Payable
Interest Expense payable balance recourse liability if Notes receivable Notes Receivable
Cash
Cash recourse liability is not (to derecognize the (to derecognize the dishonored
e. Upon full payment of used dishonored notes receivable notes receivable and the related
Interest expense is based borrowing (remaining balance of Recourse and related discounted note loans payable)
f. Payment of the loan payable on the Liability receivable)
assigned A.R) Loss from
beginning-of-the-period c. Recognize as a receivable
Recourse c. Recognize as a receivable
Loan Payable loan payable balance Accounts Receivable Liability from the maker the total from the maker the total
Cash A.R -assigned amount paid to the bank amount paid to the bank
e. Upon full payment of a credit to gain on recourse
borrowing (remaining liability may also be Receivable from maker Receivable from maker
applicable Cash Cash
balance of assigned A.R)
e. Settlement The receivable include the
factor’s holdback note’s face amount, interest, The receivable include the
Accounts Receivable note’s face amount, interest,
protest fee and other charges
A.R -assigned Cash required by bank protest fee and other charges
Receivable required by bank
from factor d. Payment of the maker of
Take note of the following: the receivable d. Payment of the maker of
a. For notification basis, there are no debits made to cash since the cash the receivable
was directly received by the bank and applied against the borrowing. Cash
b. Despite the difference between the non-notification and notification Receivable from maker Cash
Interest income Receivable from maker
basis, the ending balances of assigned receivables and loan payable are
Interest income
the same.