The Accounting behind Receivables – What you need to know David Gustin - May 19, 2014 10:55 AM | Categories: Accounting Treatment, Legal & Regulatory | Tags: dynamic discounting, KPMG, SEC We all probably remember taking high school accounting and the thrills of being lectured on income statements, debits and credits, and accounting standards and the like. Typically, if it’s not your gig, you have long forgotten this information. But while forgettable, accounting is a key cog in our society, for reporting personal and corporate taxes, for assessments for loans, and for understanding company financial statements. In the business world, accounting is one discipline of study that all people, regardless of job position, should have some knowledge on. Its concepts can be applied to many job specialties. Since the Enron and WorldCom crisis when independent auditor Arthur Anderson failed to report illegal accounting practices, the SEC has been monitoring public corporations more closely. Thus, we all should have some basic knowledge of accounting, especially as the interest in financing trade receivables by third parties is as high as ever. More than ever Receivables are being used to raise cash. When you think of a sale, it’s pretty simple: Debit “Accounts Receivable” and Credit “Credit Sale” When you are paid of course you DR Cash and CR Accounts Receivable. That is all pretty basic stuff. But what happens when you have Recourse vs. non-recourse sales Bad debt or dilution Early Payment What are the consequences of different methods on financial statements and the impact of receivables in earnings management? Also, sometimes companies have a need to accelerate cash collections. They may have immediate cash needs, or the company is unwilling/unable to bear the cost of processing and collections of credit sales. In addition, loan covenants may preclude the company from direct borrowings. In such instances companies can use their receivables to raise cash and either via Assignment (use them as collateral to borrow, or Asset Based Lending) or Factoring, an outright sale of receivables. If factored, is the transaction an outright sale of that receivable (non recourse financing) or just a borrowing (recourse - seller/borrower must buy back defaulted receivable from the lender)? All of this has tremendous impact on the financial statements of companies. Companies may use factoring not only for cash, but to camouflage increases in receivables. All of this matters, and while it's tedious to understand the details, it is critical. Over the next several weeks, Spend Matters and Trade Financing Matters will be working with KPMG to look at the various accounting issues involved with early payment techniques, including dynamic discounting, Approved Trade Payable finance (ie, supply chain finance), p-cards, and others. As this area grows in importance, it will also become bigger on the radar screen for regulatory bodies to better understand treatment. And that of course, really matters! Related Articles Why Fraud scares Investors buying invoices First Voice Ryan: 10.02.2015 at 11:11 am David – do you have any reports on the above article from KPMG on Sale of A/R and companies maintaining Trade Payable Status leveraging Supplier Finance Platforms? thanks! Reply Discuss this: Cancel reply Your email address will not be published. Required fields are marked *Comment Name * Email * Website Notify me of new posts by email.