Pledging, Factoring, Discounting Receivables

AR = oral promise

Pledge (담보 loan)

You want to get a loan. Bank's condition is "want a loan? pledge/assign your AR to us (COLLATERAL)". You are just borrowing money and the bank will use the CF of AR to repay the principle & interest in case you fail to repay. Your AR is still on your BOOK and may reduce as you don't pay. FOOT NOTE DISCLOSURE is needed.

예) interest 1% borrowing, AR pledged for 7000 loan

Date of pledging: Borrowing Payable
DR	Cash 7000
CR	BP 7000

You failed to repay. Bank collected cash from AR and used it to repay
DR	BP 930
	Interest 70
CR	AR 1000

Facotring (sale or loan)

without recourse: true sale

General Rule: You are selling AR to factor. Factor should have the full control of AR and receive future benefits by collecting CF from your customer. The factor will want to (1) charge you some fees, (2) set security for possible sales allowances, return, discounts that you estimate from customer. 

(1) Fees chaged = immediate loss
(2) Security = due from factor.
- Same amount as what I estimate to be the allowances. If all of it is actualized, at least factor can have this money as their margin. The allowances and the due-from (factors margin) will be removed off my book.
- If customer did its best and paid the factor the full amount on credit or a portion of it, then the rest of due-from balance will be returned to me. 

factoring W/O recourse
DR	Cash 170
	Due from factor (factor's margin =보증금) 10
	Loss 20
CR	AR 200

*Due from factor = seller's obligation. seller's estaimted sales return/allowances.
*Loss = interest & fees that factor charges

...continued - IF sales return and allowancese happens?
DR	Sales allowances & returns 7
CR	Due from factor 7

with recourse: pledging(loan)

IF you sold it with recourse condition, that means factor can come back to you to resell the AR that you sold them when they fail to collect CF from your customer for the whole/a portion of AR. So recourse condition doesn't count as sale, but is a loan - you received money on sale but later you may have to pay full/some of the money. 

factoring w/ recourse & record as PLEDGE(LOAN)
DR	Cash 170
	Due from factor 10
	Loss 20
CR	Borrowing Payable 200

with recourse: sale

You sold it with recourse condition, however, (1) you are not buying back the AR that you sold but replacing it with a similar one, should the factor comes back to you. (2) Also loss and 'due from' amount are measurable and lastly (3) full control of AR has been transferred. Then this is regarded as sales. 

(1) sale : ALL conditions should be met

• can negotiate the due from amount with the factor
• seller surrendered controls of the AR
• If recoursed, the seller cannot buy the AR back but replace it with a similar AR to the factor

(2) pledge: If any of (1) unmet the trasfer is treated as LOAN (pledge)

with recourse인데 매각이라고 주장하는 경우, 이를 검증하기 위해 위와 같은 criteria가 있음. 
CFO들은 AR 담보차입보다 SALE 방식을 더 선호함. SALE 방식은 AR을 줄이면서 현금이 들어오기 때문에 현금흐름표상 CFO이지만, pledging은 CFF로 분류되기 때문. 따라서 실무에서는 실질적으로는 pledging인데 SALE이라고 주장하는 경우가 있는데, 이 경우 위와 같은 조건을 감사에서 들이밀면서 조건을 충족 시키지 않으면 담보차입이라고 보고 매각거래로 인정하지 않음.

factoring w/ recourse & record as SALE
DR	Cash 270
	Due from factor (factor's margin =보증금) 10
	Loss 120
CR	AR 200
	Recourse Liability 100

*Loss = interest + fees + recourse liability
*If all transactions are settled and receivables were fully collected how much loss should I (seller of AR) recognize?
➡️"interest + fees" only

NR= written promise

Discount: Need money? Discount note by endorsing it to a 3rd party and get cash. There are 3 types:

• Sales without recourse
• Sales with recourse
• Borrowing

On the date of sale...

✔️Calculate the proceeds ✔️Recognize Interest Income accrued up until the sale
📌Note on outstanding period & apply interest appropriately

1) Sale w/o recourse
DR	Cash
	loss on sale
CR	NR
	Interest Income

2) Sale w/ recourse :  *general rule - credit 'NR discounted (contra-asset)' *If not, remove NR and disclose on foot notes
DR	Cash
	loss on sale
CR	NR discounted (contra asset)
	Interest Income
	Recourse liablity

3) Borrow :
DR	Cash
	Interest expense
CR	NR
	Interest Income

Amount paid by bank for note (Proceeds):

1) Calculate maturity value (principle+interest)

2) apply bank's DC interest (amount of interest bank desires to take) by considering the remaining outstanding period

1) - 2) = my proceeds

Be sure to calculate interest income that has been accrued to the point of sale and credit it.