Securitization is a widely-used arrangement for selling receivables. Many companies use credit card securitization and other forms of securitizations as part of their overall financing strategies. Required: Explain the nature of securitization, how it
can be implemented, and the appropriate accounting procedures related to a securitization. Include in your discussion the effects of recourse provisions on the securitization.
A securitization requires first that a company create a special purpose entity (SPE). This SPE usually is a trust or a subsidiary. The SPE buys a pool of trade receivables, credit card receivables, or loans from the company, and then sells securities such as bonds or commercial paper that are backed (collateralized) by the receivables. To qualify as a sale, the transfer of the receivables must meet specific criteria that ensure that seller has relinquished control.
Securitization of receivables without recourse means that the buyer assumes the risk of the receivables not being collectible. The buyer has no recourse to the seller if the customers do not pay the receivables. The seller accounts for the transaction as a sale of an asset.
Securitization of receivables with recourse means that the seller retains the risk of uncollectibility. The seller guarantees that the buyer will be paid even if certain receivables are uncollectible. In this case, the securitization would still be accounted for as a sale by the seller. The seller would be required to estimate and record the fair value of the recourse obligation as a liability.
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