038 Criteria for Sales of Receivables

Question 1

Define “maker”.

Answer 1

A debtor who has borrowed funds or purchased an asset and provided a note to the original creditor.

Question 2

With respect to the transfer of receivable, what are the three conditions of a sale?

Answer 2

(1) The transferred assets have been isolated from the transferor, even in bankruptcy; (2) the transferee is free to pledge or exchange the assets; (3) the transferor does not maintain effective control over the transferred assets through either an agreement that allows and requires the transferor to repurchase the assets or one which requires the transferor to return specific assets.

Question 3

In the transfer of receivables, if the three conditions for a sale are not met, what happens?

Answer 3

The receivable remains on the books of the transferor, and the transferor records a liability related to the borrowing transaction.

Question 4

Describe a transaction with recourse.

Answer 4

The transferor is responsible for nonpayment on the part of the original maker of the receivable.

Question 5

Describe a transaction without recourse.

Answer 5

Transferor is not responsible for nonpayment on the part of the maker of the receivable.

Question 6

What is the International Financial Reporting Standards (IFRS) focus regarding sales or secure borrowing?

Answer 6

Whether the transferor has transferred the rights to receive the cash flows from the receivable and whether substantially all the risk and rewards of ownership were transferred.