7.9 Classification of Cash Flows Related to Beneficial Interests in Trade Receivables
An entity may transfer/sell trade receivables to fund working capital and
liquidity needs. In such transactions, the seller/transferor of the trade
receivable, instead of receiving the entire consideration in cash, may agree to
receive part of the consideration in cash and the balance as a noncash beneficial
interest in the transferred/sold trade receivable. Such a beneficial interest may or
may not be in a certificated form and is generally subordinated to the performance
of the receivables transferred/sold.
In accordance with ASC 230-10-50-4, a transferor’s beneficial interest obtained
in a securitization of financial assets (excluding cash), including a securitization
of the transferor’s trade receivables, should be disclosed as a noncash activity.
Further, cash receipts from payments on a transferor’s beneficial interests in the
securitized trade receivables should be classified as cash inflows from investing
activities in accordance with ASC 230-10-45-12.
7.9.1 Application of ASU 2016-15 to the Sale of Trade Receivables to Multiseller Commercial Paper Conduit Structures
Questions arose regarding how to apply ASU 2016-15’s guidance on beneficial
interests in securitization transactions, particularly for entities that have
sold trade receivables to a multiseller commercial paper conduit structure. Such
questions stemmed from the fact that an entity that has sold trade receivables
to a multiseller commercial paper conduit structure must apply the amended
guidance in ASC 230-10-45-12(a) and ASC 230-10-50-4 as well as the requirements
in ASC 230-10-45-16(a).9
While commercial paper conduit structures may differ, common features of such programs include the following:
- An entity (the “seller”) transfers trade receivables to a nonconsolidated securitization entity. Such transfers qualify as sales under ASC 860.
- The seller transfers trade receivables at the inception of its involvement with the securitization entity and continues to transfer trade receivables to the securitization entity as frequently as daily. The securitization entity also receives collections from the seller’s trade receivables previously sold as frequently as daily.
- The seller continues to service the trade receivables sold to the securitization entity.
- For each trade receivable transferred to the securitization entity, the seller has the right to receive cash at a maximum advance rate. The maximum advance rate, which is determined by a formula in the agreements related to the securitization, represents the maximum amount of cash the seller can receive upon the transfer of trade receivables to the securitization entity. If the amount of cash available from the securitization entity to purchase trade receivables from the seller on a particular day is less than the maximum advance rate, the seller is entitled to only the available cash upon transfers of trade receivables to the securitization entity.
- The amount of cash received by the seller upon each sale of trade receivables to the securitization entity is referred to as the cash purchase price (CPP), and the remaining consideration received for the transfer of trade receivables is represented by a deferred purchase price (DPP). The DPP represents a beneficial interest in the securitization entity.
- After the initial transfer of trade receivables at the inception of the seller’s involvement with the securitization entity, the cash available to pay the CPP related to transfers of trade receivables is generally limited to the amount of cash received from collections of trade receivables previously sold to the securitization entity. To the extent that there are insufficient “same day” collections to fund the maximum advance rate, the entity will legally receive an additional DPP interest.
- Any cash collections on previously transferred trade receivables that exceed the maximum advance rate for that same day’s trade receivables sold to the securitization entity are held in an escrow account until each periodic settlement date.
- The settlement period is monthly. At the end of each monthly settlement period, the amounts in the escrow account are disbursed to (or retained by) the seller, the administrative agent of the conduit and other service providers, and the conduit in accordance with the terms of the securitization entity. The amount of cash in the escrow account to which the seller is entitled represents repayments of DPP amounts and, to some extent, a deferred payment of CPP amounts related to days on which the cash available as CPP for transfers of trade receivables was less than the maximum advance rate because the collections on trade receivables previously sold on that particular day were insufficient to pay the maximum advance rate.
The guidance in ASU 2016-15 (codified in ASC 230) is not clear regarding the
unit of account for determining the portions of each transfer of trade
receivables to a securitization entity that represent CPP (i.e., operating
activities) and DPP (i.e., investing activities). However, on the basis of
discussions with the SEC staff, we believe that the unit of account is each
day’s transactional activity.
Accordingly, an entity should evaluate each day’s transactional activity to
determine the CPP and DPP portions of trade receivables transferred to the
securitization entity. Thus, if the cash available from a particular day’s
collections of previously sold trade receivables is not sufficient to fund the
maximum advance rate on that day’s trade receivables sold to the securitization
entity, that deficit will reflect a noncash investing activity, which, when
collected, will represent an investing activity.
Footnotes
9
ASC 230-10-45-16(a) states that cash inflows from
operating activities include “[c]ash receipts from sales of goods or
services, including receipts from collection or sale of accounts and
both short- and long-term notes receivable from customers arising from
those sales. The term goods includes certain loans and other debt
and equity instruments of other entities that are acquired specifically
for resale, as discussed in paragraph 230-10-45-21.” In accordance with
this guidance, an entity presents the proceeds received upon a sale of
trade receivables as an operating activity. As discussed below, the
proceeds received on the sale of trade receivables to a securitization
entity is represented by the cash purchase price.