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Financial Accounting and Reporting/Blueprint/2.B

Trade receivables

Area 2: Select Balance Sheet Accounts (30-40%)

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Topics

  • Trade receivables and allowances (CECL)
  • Transfer of receivables (factoring, assignment, pledging)

Lessons

  • Trade ReceivablesFree

Study Frameworks

Trade Receivables — Recognition and Transfer

Trade Receivables
Initial Recognition
Record at transaction price (ASC 606)
Establish allowance for credit losses at origination (CECL)
Subsequent Measurement
Amortized cost less allowance for credit losses
Update allowance each period (historical + forecast)
Write off when uncollectible; recover if later collected
Transfer of Receivables
Sale (derecognize)
Factoring without recourse
Securitization (control surrendered)
Secured Borrowing (keep on books)
Factoring with recourse
Assignment
Pledging

Transfer of Receivables: Sale or Secured Borrowing?

Has the transferor surrendered control of the receivables? (All three conditions: isolated from transferor, transferee can pledge/exchange, no effective control retained)
Yes
Sale — derecognize the receivables. Record cash received, any retained interest at FV, and recognize gain or loss
No
Secured borrowing — keep receivables on the books. Record cash received as a liability. Continue to collect and remit

Days Sales Outstanding (DSO)

365 / Accounts Receivable Turnover

Average number of days to collect receivables. AR Turnover = Net Credit Sales / Average AR

Receivable Transfer Methods Comparison

MethodDerecognize AR?Who Bears Credit Risk?Key Feature
Factoring without recourseYes (sale)Factor (buyer)Clean transfer — factor assumes all collection risk
Factoring with recourseNo (secured borrowing)Transferor retains riskTransferor must repurchase or make up for bad debts
AssignmentNo (secured borrowing)TransferorSpecific receivables pledged as collateral; transferor collects and remits
PledgingNo (secured borrowing)TransferorGeneral pool of receivables pledged; least formal arrangement
Securitization (control surrendered)Yes (sale)SPE / investorsReceivables transferred to SPE that issues securities to investors
SAFESurrendered control? → Account as sale. Failed? → Secured borrowing (Encumbered)

For receivable transfers under ASC 860, the key question is whether the transferor has surrendered control. Three conditions must be met: assets are isolated, transferee can pledge/exchange freely, and transferor does not maintain effective control. If all three are met, it is a sale (derecognize). If any fails, it is a secured borrowing.

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