Reporting entities sometimes sell or factor trade receivables to banks or asset-backed commercial paper conduits, frequently under revolving financing arrangements, to accelerate cash inflows. Sellers may not receive the entire purchase price in cash at the transfer date. Rather, the seller may receive only a portion of the purchase price (which is classified as operating in the statement of cash flows), with the difference consisting of a receivable from the bank or conduit. The repayment of that receivable is typically contingent on the subsequent collections of the underlying trade receivables sold. This deferred payment arrangement, a receivable from the bank or facility representing a beneficial interest in the transferred trade receivables, is commonly referred to as the “deferred purchase price,” or “DPP.”
requires that a transferor’s beneficial interest obtained upon sale in a securitization of financial assets be disclosed as a noncash activity, and any subsequent cash receipts from payments on a transferor’s beneficial interests in securitized trade receivables to be classified as cash inflows from investing activities when the trade receivable is derecognized upon transfer. Subsequent cash receipts, occurring after receipt of proceeds of the initial sale of receivables, cannot be attributed to the receivable because the receivable is no longer on the balance sheet. Instead, the subsequent cash receipts are considered an investing relationship with the bank or conduit.
Pursuant to replacement or unwinding of these accounts receivable programs, or through other transactions, the original seller of the accounts receivable balances may reacquire some of its own previously sold receivables. Just as the subsequent collections on any sold receivables after the initial sale are treated as an investing cash flow, the subsequent collections on any receivables reacquired would continue to be of an investing nature and included as cash inflows from investing activities; they would not revert back to an operating activity. The nature of these collections on reacquired receivables do not change to that of an operating cash flow due to the repurchase transaction.
Example FSP 6-14 illustrates the statement of cash flows classification for receivables sold under ASC 230
EXAMPLE FSP 6-14
FSP Corp sells its trade receivables into a revolving structure with a 90% advance rate applied to each receivable transfer, with monthly payments out of the collections account to the conduit and the selling company on the 15th of each month (the Payment Date). The structure was set up in a prior period and receivables have been transferred previously and funded in accordance with the terms of the receivables purchase agreement. The conduit has reached its funding limit under the agreement; therefore, going forward, the only source of cash to pay for receivables sold each day are collections on receivables previously sold to the conduit. Collections received on a daily basis can be used to pay for receivables transferred that same day after withholding amounts needed to pay the conduit at the upcoming Payment Date. This set-side, and any amounts remaining after payment to the transferor for that day’s new receivables, is deposited into an off-balance sheet collections account and held in trust until the next Payment Date. Since trade receivables are non-interest bearing, the purchase price of each receivable under these programs typically incorporates a discount from the receivable’s face amount. For simplicity, this example assumes a purchase price equal to face.
The following table summarizes the activity during the 30-day period preceding a Payment Date:
Cash collections on prior A/R
Trust fund collections account
a - c
[for simplicity, assume no additional activity takes place between the 20th of the month and the ensuing Payment Date on the 15th]
[on the 15th, the $195,000 in the collections account is disbursed and allocated as follows]
*$4,000 for estimated payments to fund interest and fees payable to the conduit for the monthly period preceding the Payment Date
How should these transactions be reflected on the statement of cash flows?
In our view, an appropriate basis of presentation would treat each day’s collective activity as the unit of analysis. Under this approach, each day’s cash collections released to the seller (i.e., reinvested) would be allocated between operating and investing inflows. Cash received would first considered to be payment for that day’s transfers of new receivables (subject to the applicable “advance rate”), and would be considered an operating inflow. Any excess that day would be deemed to be a repayment of the DPP, and an investing inflow. Any increase in the DPP (representing the excess of the transferred receivables’ purchase price over cash received) would be recorded and disclosed as a non-cash investing activity based on the fair value of DPP received.
The following table illustrates the application of this approach, based on the stipulated daily activity. All amounts exclude consideration of discounts and anticipated losses.
Noncash investing disclosure
The presentation in the statement of cash flows aligns with the legal form of the exchanges that take place daily between the seller and the conduit, and at the monthly settlement date. Each day serves as the unit of analysis. In this example, a substantial portion of the cash received by the seller for the period consists of a payout from the collections account at the Payment Date ($191,000). Consistent with the terms of the receivables purchase agreement, this receipt represents a return of a portion of the seller’s DPP – an investing cash inflow.