Receivables Purchase Category PDF

Receivables purchase category Key terms True sale “[A]n accounting and legal expression connoting that a financial asset or negotiable instrument has been sold by one party to another in the sense of no longer being recorded in the balance sheet of the seller and instead being r...

Receivables purchase category Key terms True sale “[A]n accounting and legal expression connoting that a financial asset or negotiable instrument has been sold by one party to another in the sense of no longer being recorded in the balance sheet of the seller and instead being recorded on the balance sheet of the purchaser.” (GSCFF, 2016) Recourse “[The] legal ability [that] the purchaser of a financial asset may have to fall back on the original creditor if the current debtor defaults. For example, an account receivable sold with recourse enables the buyer of the receivable to make claim on the seller if the account doesn’t pay.” (Dictionary of Finance and Investment Terms, 2014) The defining characteristic of this category is that the seller of goods or services obtains finance by selling all or part of the receivable relating to those goods or services to the finance provider, who becomes the owner of the receivables. The method by which ownership of the asset is transferred to the finance provider varies depending on the jurisdiction, but involves some form of assignment of title rights. Upon execution of the assignment, the finance provider pays the seller a sum that is based on the face value of the receivable. Key considerations When a finance provider is contemplating the purchase of receivables, it will take the following into consideration: validation that the receivable exists; verification that the receivable is assignable in the seller’s jurisdiction; and confirmation that the receivable is enforceable against the debtor in the debtor’s jurisdiction. The title of this category suggests that the receivable is the only asset that can be purchased by a finance provider. This is not strictly true as it is also possible to assign inventory to the finance provider and to create a ‘true sale’. In practice, the agreement with the finance provider will include a repurchase clause (known as a ‘repo’) so that the goods are sold back to the client in order for them to sell goods to their end-customer. A facility may be granted ‘with recourse’ or ‘without recourse’ back to the seller of the asset. In practice, however, the rights of recourse are not usually quite so clear-cut, and the receivables purchase agreement will usually specify the circumstances under which the finance provider can exercise their right of recourse. This will have a direct bearing on the balance-sheet treatment in the client’s books. The decision regarding balance-sheet treatment is always at the sole discretion of the client’s auditors but, as a guiding principle, if a finance provider can exercise recourse entirely at their option, then the auditor would regard this as bank debt. In other words, the finance would be ‘on balance sheet’. © LIBF (https://brightspace.libf.ac.uk/d2l/lor/viewer/view_private.d2l? ou=6606&loIdentId=1153)