Companies often transfer trade receivables to fund working capital and liquidity needs. Examples of such transfers include asset factoring arrangements and transfers of assets (often trade accounts receivables) to bank-sponsored commercial paper conduits and are sometimes referred to as securitizations.
Recent amendments to the accounting guidance governing such transactions have significantly altered the accounting analysis of trade receivable transfers, making it more likely that many structures used to affect such transfers will be accounted for as secured borrowings.
New structures continue to evolve in the marketplace and assessing these transactions under the new guidance can often be challenging. Considerations extend beyond balance sheet ratios, as the revised rules have led to the SEC staff requesting that public filers justify why collections under these structures can continue to be classified as operating cash flows.
While GAAP changes have made these transactions more complex, funding working capital and liquidity needs without further leveraging the balance sheet is still possible. PwC has significant experience with these transactions – we can help companies understand the accounting impacts and avoid unintended financial reporting issues.
Chad Kokenge, Partner
Impacts to companies:
- The accounting governing securitization structures is difficult to apply and gives rise to divergent interpretations. Certain commonly used securitization structures can lead to such transactions being accounted for as a borrowing as opposed to a sale. This can adversely affect leverage ratios and severely limit a company's ability to obtain additional future financing.
- Achieving sales treatment on the transfer, but subsequently having to record collections of any deferred purchase price as a financing cash flow as opposed to an operating cash flow can further limit a company's ability to obtain additional future financing.
What companies should do:
Accounting for transfers of financial assets as a sale has become more difficult, but is not impossible. A company considering these types of transactions should:
- Determine whether a structure that avoids participating interest treatment would be acceptable for you and the counterparty,
- Determine whether your business has any requirements to maintain operational control over the assets transferred and evaluate whether that operational control will preclude sale treatment under the accounting guidance,
- Assess the cash flow classification impacts of the transaction and understand whether operating cash flow treatment of future collection may be acceptable.