Criteria for sale of receivables

Question 1

What is a “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 (That would make it an implied 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

If the conditions are met to qualify a receivable transfer as a sale how is the receivable accounted for?

Answer 3

It is removed from the books of the transferor and a gain or loss on the receivable will be recorded.

Question 4

If the conditions are not met to qualify a receivable transfer as a sale how is the receivable accounted for?

Answer 4

It implies a situation which the transferor is borrowing funds and using the receivables as collateral for a loan. The transferor will keep the receivable on their books, but record a liability related to the borrowing transaction

Question 5

Describe a transaction without recourse.

Answer 5

Transferor is not responsible for nonpayment on the part of the maker of the receivable. These are typically treated as sales in the case of receivables

Question 6

Describe a transaction with recourse.

Answer 6

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