RECEIVABLE FINANCING & LOAN RECEIVABLE

Receivable financing

Is the financial flexibility or capability of an entity to raise money out of its receivables. 

1. Pledge of accounts receivable 

2. Assignment of accounts receivable 

3. Factoring of accounts receivable 

4. Discounting of notes receivable

Common Forms of Receivable Financing: 

PLEDGE OF ACCOUNTS RECEIVABLE 

When loans are obtained from a bank or lending institution, accounts receivable may be collateral security for the payment of the loan. 

Key Characteristics: 

• Borrower normally makes collections of pledged accounts 

• Collections may be required to be turned over to the bank in satisfaction for the loan 

• No complex problems involved except accounting for the loan 

• No entry is necessary for the pledged accounts 

• Sufficient disclosure in a note to financial statements 

ASSIGNMENT OF ACCOUNTS RECEIVABLE 

means that a borrower (assignor) transfers rights in some accounts receivable to a lender (assignee) in consideration for a loan. 

Pledge vs. Assignment Comparison: 

Aspect	Pledge	Assignment
Nature	General	Specific
Collateral	All accounts serve as security	Specific accounts serve as security
Formality	Less formal	More formal (financing agreement + promissory note)

Nonnotification Basis: 

• Customers are NOT informed that their accounts have been assigned 

• Customers continue to make payments to the assignor 

• Assignor remits collections to the assignee 

Notification Basis: 

• Customers are notified to make payments directly to the assignee 

Factoring

is a sale of accounts receivable usually on a without recourse, notification basis. 

• Entity sells accounts receivable to a bank or finance entity called a factor 

• Gain or loss is recognized for the difference between proceeds received and net carrying amount of accounts receivable factored 

• Entity actually transfers ownership to the factor 

• Factor assumes responsibility for uncollectible factored accounts 

• Customers are notified and required to pay directly to the factor 

Key Characteristics of factoring

Factoring vs. Assignment: 

Aspect	Assignment	Factoring
Ownership	Assignor retains ownership	Factor acquires ownership
Uncollectible Risk	Assignor bears the risk	Factor assumes the risk
Notification	May or may not notify customers	Customers always notified

1. Casual Factoring

2. Factoring as a Continuing Agreement

Types of Factoring: 

Casual Factoring: 

• Entity in critical cash position 

• Factors some or all accounts receivable at a substantial discount

Factoring as a Continuing Agreement: 

• Before merchandise is shipped, entity requests factor's credit approval 

• If approved, account is sold immediately to factor after shipment 

• Factor assumes credit and collection functions 

• Factor typically charges a commission or factoring fee of 5% to 20% 

current asset 

Factor's Holdback: 

• Predetermined amount withheld by factor as protection against: 

• Customer returns and allowances 

• Other special adjustments 

• Actually a receivable from factor 

• Classified as

1. Maker

2. Payee

Original Parties in a Promissory Note: 

• : The one liable (debtor) 

• : The one entitled to payment on maturity date 

1. endorser 

2. endorsee 

Discounting the Note: 

• When a note is negotiable, the payee may obtain cash before maturity date 

• To discount the note, the payee must endorse it 

• The payee becomes an

• The bank becomes an

Endorsement

is the transfer of right to a negotiable instrument by simply signing at the back of the instrument. 

1. With Recourse: 

2. Without Recourse: 

Types of Endorsement: 

with recourse 

Endorser shall pay the endorsee if the maker dishonors the note 

• Legal term: Secondary liability of the endorser 

• Accounting term: Contingent liability of the endorser 

• In the absence of evidence to the contrary, endorsement is assumed to be

Without Recourse: 

• Endorser avoids future liability even if the maker refuses to pay on maturity date 

• Sale of note receivable is absolute 

• No contingent liability

Net Proceeds 

The discounted value of the note received by the endorser from the endorsee. 

Formula: 

= Maturity Value - Discount

Maturity Value 

The amount due on the note at the date of maturity. 

Formula: 

= Principal + Interest

Maturity Date 

The date on which the note should be paid. 

1. Principal (Face Value) 

2. Interest 

3. Interest Rate 

The amount appearing on the face of the note. 

The amount of interest for the full term of the note. 

Formula: 

Interest = Principal x Rate x Time
 

The rate appearing on the face of the note. 

1. Time 

2. Discount 

3. Discount Rate 

4. Discount Period 

5. 
   

The period within which interest shall accrue (full term of the note from date of note to maturity date). 

8.

The amount of interest deducted by the bank in advance. 

Formula: 

Discount = Maturity Value x Discount Rate x Discount Period
 

9.

The rate used by the bank in computing the discount. 

• Should not be confused with the interest rate 

• If no discount rate is given, the interest rate is safely assumed as the discount rate 

10.

The period of time from date of discounting to maturity date (unexpired term of the note). 

Formula: 

Discount Period = Term of Note - Expired Portion up to Date of Discounting
 

Note: In counting, "exclude the first day but include the last day." 

ACCOUNTING FOR DISCOUNTING WITH RECOURSE 

If the discounting is with recourse, the transaction is accounted for as either: 

Option A: Conditional Sale with Recognition of Contingent Liability 

• Recognizes a contingent liability 

• Note receivable is removed from books 

• Liability for Note Receivable Discounted is recorded 

Option B: Secured Borrowing 

• Transaction treated as a loan 

• Note receivable remains on books 

• Liability is recorded for the amount borrowed 

loan receivable

is a financial asset arising from a loan transaction where a lender provides funds to a borrower in exchange for a promise to repay the principal amount plus interest over a specified period. 

Lending activities

typically involve: 

• Identifying and attracting potential borrowers 

• Originating the loan 

• Disbursing funds to the borrower

Origination Fees 

Fees charged by the bank against the borrower for the creation of the loan. 

Accounting for Origination Fees 

• Origination fees received from borrower are recognized as unearned interest income 

• Amortized over the term of the loan using the effective interest method 

Direct Origination Costs 

If origination fees are not chargeable against the borrower, the fees are known as ____. 

Treatment: 

• Direct origination costs are deferred and amortized over the term of the loan 

• Preferably, direct origination costs are offset against any origination fees received 

amortized cost

SUBSEQUENT MEASUREMENT OF LOAN RECEIVABLE 

Subsequent to initial recognition, loan receivable is measured at using the effective interest method. 

Amortized Cost Calculation: 

Amortized Cost = Initial Carrying Amount
- Principal repayments
+ Amortization of discount (or - Amortization of premium)
- Reduction for impairment or uncollectibility 

Stage 1 

No significant decline in credit quality OR low credit risk

12-month expected credit loss

Based on gross carrying amount (face amount)

Stage 2 

Significant increase in credit risk but NO objective evidence of impairment

Lifetime expected credit loss

Based on gross carrying amount (face amount)

Stage 3 

Objective evidence of impairment

Lifetime expected credit loss

Based on net carrying amount (face amount - allowance)

12-Month Expected Credit Loss: 

• Portion of lifetime expected credit loss from default events possible within 12 months after the reporting period 

• Recognized for Stage 1 loans

Lifetime Expected Credit Loss: 

• Expected credit loss that results from all default events over the expected life of the instrument 

• Recognized for Stage 2 and Stage 3 loans 

• Always recognized for trade receivables through aging, percentage of accounts receivable, and percentage of sales