Criteria for Sale of Receivables

Question 1

What are the three criteria for determining if the transfer of receivables is a sale?

Answer 1

• Transferred assets have been isolated from transferor
• Transferee is free to pledge or exchange the assets
• Transferor does not maintain effective control through a return or repurchase agreement

Question 2

If the three criteria aren’t met, how is transaction treated? What are the accounting implications?

Answer 2

• As a loan
• No gain or loss on sale of receivables, receivables stay on books of transferor, record liability, and record interest expense related to loan