RECEIVABLE FINANCING

Definition: This refers to the act of inducing cash inflows from the receivables
other than collection on a normal basis. Simply stated, it is the financial
flexibility or capability of an entity to raise money out of its receivables.

Financial Distress: the time to use receivable financing – where collections of

receivables are delayed but cash payments for obligations must be maintained.

Common Forms:

1. Pledge / Hypothecation 2. Factoring

3. Assignment 4. Discounting

Note: 1 – 3 are forms applicable for accounts receivable while 4 is applicable for
notes receivable only.

PLEDGE / HYPOTHECATION OF ACCOUNTS RECEIVABLE

Characteristics
1. All receivables serve as collateral security for loans. (Pledge is a secured
borrowing transaction)
2. Pledge receivables are not derecognized, thus there is no charge in
receivable balance.
3. Disclosure of A/R pledged is required (in the notes to FS).

The loan is recorded by debiting cash and discount on note payable if loan is
discounted, and crediting note payable. The subsequent payment of the loan is
recorded by debiting note payable and crediting cash.

Solution Guide:
Face Value of Loan xx
Less: Discount of Loan xx
Net Proceeds from Pledge xx
ILLUSTRATION:

On November 1, 2024, an entity borrowed P1,000,000 from BDO and issued a

promissory note for the same. The term of the loan is one year and discounted
at 12%. The entity pledged accounts receivable of P2,000,000 to secure the
loan.

Nov. 1, 2024
Cash 880,000
Discount on note payable 120,000
Note Payable – bank 1,000,0
00

Dec. 31, 2024

Interest expense 20,000
 Discount on note 20,000
payable

Presentation

Note payable - Bank P1,000,000

Discount on note payable (100,000)
Carrying amount P900,000

Disclosure

“The note payable to bank matures on November 1, 2025, and is secured by

acconts receivable with face value of P1,000,000.”

ASSIGNMENT OF ACCOUNTS RECEIVABLE

PLEDGE ASSIGNME
NT
1. Formal x 
2. Transfer of Rights x 
3. Transfer of x x
Ownership
4. AR served as  
security
General Specific

Definition: A borrower called the assignor (borrower) transfers rights in some

accounts receivable to a lender called the assignee (lender) in consideration for
a loan. Assignment is secured by a financing agreement and a promissory note
both of which the assignor signs.

Features of Assignment Forms of Assignment

1. Notification Basis – debtors whose
1. The loanable amount is
receivables have been assigned are
only a percentage of the
notified of the assignment. Hence, the
face value of AR. (e.g.
debtors will remit payments on the
70%, 80%, or 90%
receivables not to the assignor but to the
depending on the quality
assignee.
of accounts.
2. Non-Notification Basis – debtors whose
2. Bank charges a service
receivables have been assigned are NOT
fee or commission in
notified o the assignment. Hence, the
advance.
debtors will continue to remit payments on
3. Equity on assigned
the receivables to the assignor.
accounts should be
Assignments are commonly made on a
disclosed in notes to FS.
non-notification basis.

ILLUSTRATION: Non-Notification

An entity assigned P700,000 of accounts receivable to a bank under a

nonnotification arrangement. The bank advances 80% less a service charge of
P5,000. The entity signed a promissory note that provides for interest of 1% per
month on the unpaid loan balance.

1. Transfer of assigned accounts receivables: Accounts receivables –

assigned = P700,000
2. Cash received from the loan

Accounts receivable - assigned P700,00

Percentage of accounts 80%
receivable
Notes payable 560,000
Service charge (5,000)
Cash received P555,000
3. Sales return of P20,000

Accounts receivable - assigned P700,000

Sales return (20,000)
Accounts receivables - assigned P680,000

4. Collected P300,000 less 2% discount

Accounts receivable - assigned P680,000

Sales discount (2% of P300,000) (6,000)
Collections (294,000)
Accounts receivable - assigned P380,000

5. Remittance of Collections plus interest for 1 month

Collections for notes payable P294,000

Interest expense (1% 5,600
P560,000)
Total payments to assignee P299,600
ILLUSTRATION: Notification

An entity assigned P1,000,000 of accounts receivable to a bank under a

notification arrangement. The bank loans 80% less 4% service charge on the
gross amount assigned. The entity signed a promissory note that provides for
1% interest pe month on the unpaid loan balance.
 FACTORING OF ACCOUNTS RECEIVABLE
Definition: It is a sale of accounts receivable usually on a without recourse,
nonnotification basis to a factor (usually a bank or financing entity). Transfer of
ownership. The factor then assumes responsibility for uncollectile accounts.

1. Factoring without recourse (if silent) – the transferror is not liable in

case the debtor fails to pay.
2. Factoring with recourse – the transferror guarantees payment in the
event the debtor fails to pay.

Note: Factoring differs from an assignment in that an entity actually transfers

ownership of the accounts receivable to the factor. Thus, the factor assumes
responsibility for uncollectible factored accounts.

Assignment – assignor retains ownership of the accounts assigned.

Because of the nature of the transaction, the customers whose accounts are
factored are notified and required to pay directly to the factor. The factor has
then the responsibility of keeping the receivable records and collecting the
accounts

Additional information:

1. Proceeds from factoring

Solution Guide:

Face value of AR XX
Less: Commission and Other XX
Charges
Factor’s Holdback XX
Net Proceeds from Factoring XX

2. Gain or Loss on factoring

Solution Guide:

Proceeds – Net carrying amount of factored receivables =

Gain/Loss

Selling Price (Net Proceeds + Factor XX

Holdback)
Less: CA of AR (NRV) XX
Gain or Loss on Factoring XX

Forms:

 Casual factoring
  Factoring as a continuing agreement

CASUAL FACTORING
An entity factored P100,000 of accounts receivable with an allowance for
doubtful accounts of P5,000 for P80,000.
Under Factoring as a
Continuing Agreement:

Recourse Obligation – a certain

amount charged by the factor to
customer (maker) who isn’t able
to pay. (Provided this is not the
whole amount of A/R)

FACTORING AS A CONTINUING AGREEMENT

 Factoring may involve a continuing arrangement where a finance entity
purchases all of the accounts receivable of a certain entity.
 Before a merchandise is shipped to a customer, the selling entity requesrs
the factor’s credit approval
 Factor – credit and collection function
o Commission or factoring fee (e.g. 5% to 20%)
o Factor’s holdback
 Withhold a predetermined amount as a protection agains
customer returns and allowances and other special
adjustments.
 Receivable from factor (current assets).

ILLUSTRATION: Without Recourse

An entity factored accounts receivable of P500,000 with credit terms of 2/10,

n/30 immediately after shipment of the goods to the customer. The factor
charged a 5% commision based on the gross amount of the receivables
factored. In addition, the factor withheld 20% of the amount of the receivables
factored to cover sales return and allowances.

ILLUSTRATION 2: With Recourse

An entity factored P3,000,000 of accounts receivable at year-end. Control was

surrendered. The factor accepted the accounts receivable subject to recourse
for nonpayment. The fair value of the recourse obligation is P100,000. The
factor assessed a fee of 6% and retained a holdback equal to 10% of the
accounts receivable. In addition, the factor charged 12% interest computed on a

weighted averafe time to maturity of 50 days.

CREDIT CARD
DISCOUNTING OF NOTE RECEIVABLE
Definition: In a promissory note, the original parties are the maker and payee.
The maker is the one liable and the payee is the one entitled to
payment on the date of maturity. When a note is negotiable, the payee may
obtain cash before maturity date by discounting the note at a bank or another
financing company.

To discount the note, the payee must endorse it. Thus, legally the payee
becomes an endorser, and the bank becomes an endorsee.

Forms of
Discounting

1. Discounting without recourse basis – the endorser is not held liable in

the case maker fails to pay. The note discounted has been essentially
sold outright and therefore derecognized.
2. Discounting with recourse basis – the endorser is held liable in case
the maker fails to pay. The note receivableis not derecognized.
a. Conditional sale – a contingent liability is disclosed in the notes to
FS.
b. Secured borrowing – a liability is recognized on the discounting.

Endorsement – the transfer of right to a negotiable instrument by simply

signing at the back of the instrument.

1. Endorsement with recourse – endorser shall pay the endorsee if the

maker dishonors the note.
a. Legal parlance – secondary liability of the endorser.
b. Accounting parlance – contingent liability of the endorser.
2. Endorsement without recourse – the endorser avoids future liability
even if the maker refuses to pay the endorsee on maturity date.
Note: In the absence of any evidence to the contrary, endorsement is
assumed to be with recourse.

Without Recourse Conditional Sale Secured Borrowing

X Cash X Cash X
Cash
X X X
X Loss on Discounting X Interest Expense X
Loss on Discounting
X X X
Notes X Notes Liability for NR X
X
Receivable X Receivable Discounted X
X
Gain on X Discounted Interest Income X
Discounting X Gain on X X
Interest Income X Discounting X
 Interest Income X
X
X
Note:

1. Note receivable discounted account is presented as a contra-asset acount.

2. Based on the entries above, gain or loss on discounting is applicable only
to without recourse basis and conditional sale basis.

Note: There is NO gain or loss on factoring if factoring is on a with recourse

basis – secure borrowing. (To explain, refer to the summary of entries on the
table)

DEFINITION OF TERMS
Net Proceeds The discounted value of the note received by the
endorser from the endorsee.
Net Proceeds = Maturity Value – Discount
Maturity Value The amount due on the note at the date of maturity.
Maturity Value = Principal + Interest
Maturity Date The date on which the note should be paid.
Principal the amount appearing on the face of the note.
Face Value
Interest The amount of interest for the full term of the note.
Interest = Principal x Rate x Time
Interest Rate The rate appearing on the face of the note.
Time The period within which interst shall accrue. For
discounting, it is the period from the date of note to
maturity date.
Time = Full Term of the note. (entire period)
Discount The amount of interest deducted by the bank in
computing the advance.
Discount = Maturity Value x Discount Rate x
 Discpunt Period
Discount Rate The rate used by the bank in computing the discount,
should not be confused with the interest rate. The
discount rate and interst rate are different, BUT if no
discount rate is given, the interest rate is safely
assumed as the discount rate.
Discount Period The period of time from the date of discounting to
maturity date. Discount period is the unexpired term
of the note.
Discount Period = Term (of the note) – Expired
Portion (up to the date of discounting)
ILLUSTRATION: Discounting Without Recourse

A P1,000,000, 180-day, 12% note dated July 1 was received from a customer
and discounted without recourse on August 30 at 15% discount rate.
 ACCOUNTING FOR NOTE RECEIVABLE DISCOUNTING
The accounting for note receivable discounting depends on whether the
discounting is with or without recourse,

Discounting Without Recourse – the sake of the note receivable is absolute

and therefore there is no contingent liability.

The note receivable account is credited directly because the sale of the note
receivable is without recourse or absolute. The interest income is credited for
the actual interest earned on the date of discounting.

Discounting With Recourse - ILLUSTRATION

A P2,400,000, 6-month, 12% note dated February 1 is received from a customer

by an entity and discounted by First Bank on March 1 at 15%.

Principal 2,400,000
Interest (2,400,000 x 12% x 6/12) 144,000
Maturity Value 2,544,000
Discount (2,544,000 x 15% x 5/12) (159,000)
Net Proceeds from discounting 2,385,000

Term of note 6 months

Less: Age of note (Feb 1 – Mar 1 month
1)
Discount Period 5 months
Since te term of the note is expressed in “months”, the counting is by
months regardless of the number of days in a month.

Principal 2,400,00
0
Accrued interest receivable (2,400,000 x 24,000
12% x 1/12)
Carrying amount of note receivable 2,424,00
0
The accrued interst receivable is for one month from February 1 to the date of
discounting on March 1.

Net Proceeds from discounting 2,385,00

0
Carrying amount of note receivable 2,424,00
0
Loss on note receivable discounting (39,000)
If the discounting is with recourse, the transaction is accounted for as either of
the following:

 Conditional sale of note receivable recognizing a contingent liability

 Secured borrowing

CONDITIONAL SALE
Characteristics
 If the discounting is treated as a conditional sale, a contingent
liability is recognized.
 The note receivable discounted account is deducted frim the total
notes receivable when preparing the statement of financial position
with disclosure of the contingent liability.
Cash 2,385,000
Loss on notre receivable discounting 39,000
Note receivable – discounted 2,400,000
Interest income 24,000
NOTE PAID BY MAKER ON MATURITY
On August 1, date of maturity, the note is paid by the maker to the First Bank.
The contingent liability is simply extinguished.
Note receivable – 2,400,000
discounted
Note receivable 2,400,000

NOTE IS DISHONORED BY MAKER

The note is dishonored by the maker on August 1, and the entity pays the First
Bank the maturity value of the note, P2,544,000, plus protest fee and other
bank charges of P6,000.

1. To record the payment to First Bank:

Accounts receivable 2,550,00
0
Cash 2,550,00
0

2. To cancel the contingent liability:

Note receivable 2,400,00
discounted 0
Note receivable 2,400,00
0
SECURED BORROWING
Characteristics
 If the discounting is treated as a secured borrowing, the note
receivable is not derecognized but instead an accounting liability
is recorded at an amount equal to the face amount of the enote
receivable discounted.
 There is no gain or loss on discounting if the note receivable
discounting as accounted for as secure borrowing.
ILLUSTRATION
Cash 2,385,00
0
Interest Expense 39,000
Liability for note receivable 2,400,00
discounted 0
Interest Income 24,000

NOTE PAID BY MAKER ON MATURITY

If note is paid by maker ti the First Bank, the liability for note receivable
discounted and note receivable are dereconized.
Liability for note receivable 2,400,00
discounted 0
Note receivable 2,400,00
 0

NOTE IS DISHONORED BY MAKER

The note is dishonored by the maker on August 1, and the entity pays the First
Bank the maturity value of the note, P2,544,000, plus protest fee and other
bank charges of P6,000.

1. To record the payment to First Bank:

Accounts receivable 2,550,0
00
Cash 2,550,0
00

2. To derecognize the liability for note receivable

discounted and note receivable:
Liability for note receivable 2,400,0
discounted 00
Note receivable 2,400,0
00
Dishonored Notes
Notes receivable not collected at maturity are considered dishornored
notes. These are transferred from notes receivable to accounts receivable
the amount of which is equal to the maturity value of the note plus any
direct costs or protest fees.
CONDITIONAL SALE OR SECURED BORROWING
PFRS 9, par. 3.2.3, provides that an entity shall derecognize a financial asset
when either one of the following criteria is met:

1. The contractual rights to the cash flows of the financial asset have
expired.
2. The financial asset has been transferred and the transfer qualifies
for derecognition based on the extent of transder od risks and rewards
of ownership.
The first criterion is usually easy to apply. The contractual rights to the cash
flows may expire, for example when a note receivable from a customer is fully
collected.

The application for the second criterion is often complex. It relies on the
assessment of the extent of the transfer of risks and rewards of ownership.
PFRS, par. 3.2.6, provides the following guidelines for derecognition based
on transfer of risks and rewards.
 If the entity has transferred substantially all risks and rewards, the
financial asset shall be derecognized.
  If the entity has retained substantially all risks and rewards, the financial
asset shall not be derecognized.
EVALUATION
CONCLUSION
END OF RECEIVABLE FINANCING