Question

Health Provider company offers health-care-related services and to reduce administrative obligations and to allow for additional financing options for its patients, Health Provider enters into a health services financing agreement with a bank. 1. Under this agreement, patients have the option of requesting that the company transfer its receivables to the bank. Once such a request is made, the following would occur: • The company would transfer the patient’s receivables to the bank. • The bank would pay the company the balance of the receivables in cash. • Because the bank would now hold the receivables from the patient, the patient and bank would enter into a low-interest loan agreement to stipulate the repayment terms. 2. The agreement between the company and the bank contains the following additional provisions: • Repurchase obligation: the company is required to repurchase the transferred receivables. • Termination payment obligation: upon the termination of the agreement, the company is required to repurchase all transferred receivables held by the bank, unless otherwise agreed to in writing. Either party may terminate the agreement as long as 30 days’ notice is given. • Although it has not yet happened, company management believes that it will receive a “true sale” opinion from its legal counsel regarding the transferred receivables. • The agreements do not prohibit the bank from transferring the receivables to another party either as collateral for a borrowing or in an outright sale.

Do you have any suggestions for Health Provider company? And why?

Answer 1

Answer:-

1.The FASB ASC (Accounting Standards Codifications) 860 Transfers and Servicing would apply to the transter of recervables between the company and the bank

2.The transfer of recervable cannot be considered as sale transaction as it is not revenue i based transaction and only conversion of assets from recervables to cash is taking place.

3.The transterred recervable shall be accounted as Contingent lablity in the books of
company.

4.The FASB codification under US GAAB is Receivable 10 - Loan and Debt Securities Acquired with Deteriorated Credit Quality 40 -

5.Timely receipts are to avoid the cash crunch and the asset liquidity is enhanced,Hence, it is not a sale but a credit. It is a funding mechanism to pay for unallocated portions without any conditions.

6.The company should account for transfers.It is debit to receivables and credit party a/c. Debit one party and credit another party