Question

E7.18 (LO 7, 8) (Transfer of Receivables with Servicing Retained) Lute Retail Ltd. follows ASPE. It transfers $355,000 of its accounts receivable to an independent trust in a securitization transaction on July 11, 2020, receiving 96% of the receivables balance as proceeds. Lute will continue to manage the customer accounts, including their collection. Lute estimates this obligation has a liability value of $12,500. In addition, the agreement includes a recourse provision with an estimated value of $9,900. The transaction is to be recorded as a sale.

Instructions
a. Prepare the journal entry on July 11, 2020, for Lute Retail Ltd. to record the securitization of the receivables.

b. What effect will the securitization of receivables have on Lute Retail Ltd.'s accounts receivable turnover? Comment briefly.

c. Would the treatment of the transaction change if Lute Retail followed IFRS? Compare how ASPE and IFRS differ in how you determine if the receivables should be derecognized.

Answer 1

a.

Calculation of net proceeds

Particulars		Amount ($)
Cash received ( $ 355,000 * 96%)		340,800
Less: recourse obligation	9,900
Unrecovered service costs	12,500	22,400
Net proceeds		318,400

Computation of Gain or Loss

Particulars	Amount ($)
Carrying amount of receivables	355,000
Less : Net proceeds	318,400
Loss on sale of receivables	36,600

The required journal entry would be:

Date	Particulars	Debit	Credit
	Cash	$ 340,800
	Loss on sale of receivables	$ 36,600
	Recourse Liability		$ 9,900
	Servicing Liability		$ 12,500
	Accounts receivable		$ 355,000
	(To record securitization of receivables)

b.

The securitization of accounts receivables shall improve accounts receivable turnover ratio after above entry. The denominator in ratio i.e. accounts receivable gets reduced by $ 355,000, thereby contributing to higher ratio.

If the computation is made after securitization, the balances of sales and accounts receivables (average) would remain unaffected.

c.

ASPE is based on the control approach. If control is surrendered, the receivables can be derecognized despite continued involvement by Lute. Lute shall use financial components approach.

On the other hand, IFRS looks at certain criteria to be met. It determines if all risks and rewards have been substantially transferred. If this cannot be determined, IFRS leaps on to control approach of ASPE.

As per IFRS, receivable is transferred if :

• Contractual rights to receive cash flows is transferred.
• Entity receives cash flows but has contractual obligation to pay cash flows. Further other conditions must be met as per IFRS. The entity has no obligation to pay amount to recipient unless it has received equivalent amount of cash flows. The entity is prohibited from selling and pledging original asset. The entity has obligation to remit any cash flows on behalf of eventual recipients without material delay.

So, Lute has transferred the receivables to trust with recourse provision as per the question. Hencem Lute must pay obligations irrespective of cash flows thereby not meeting conditions laid under IFRS.

If it is certain, Luke cannot derecognize the asset under IFRS, Luke should record the asset like secured borrowing.

To record, the required journal entry would be:

Date	Particulars	Debit	Credit
	Cash	$ 340,800
	Securitization Liability		$ 340,800
	(To record securitization and receipt of cash)
	Interest expense	14,200
	Securitization liability	340,800
	Accounts receivable		355,000
	(To record the payment)

kindly upvote