Choose the correct statement(s) below regarding the transfer of financial assets
ID: 2561504 • Letter: C
Question
Choose the correct statement(s) below regarding the transfer of financial assets such as receivables:
I. In a transfer of receivables without recourse, the transferee obtains the right to compensation from the transferor for customer accounts that prove to be uncollectible.
II. In a transfer which qualifies as a secured borrowing, the transferor will record a liability for the amount borrowed.
III. Under otherwise identical conditions, a transferor will generally pay a higher commission percentage on a receivable sold with recourse versus one sold without recourse.
Multiple Choice
I and III only.
II only.
I, II and III.
III only.
Explanation / Answer
The correct option is II only
A transfer without recourse indicates that the transferee will bear the risk of collection and has no risk to the transferor if some or all of the receivables prove uncollectible. Hence the statement (I) is not correct.
A transfer of receivables does not always result in the transferee receiving substantially all of the rights and risks of ownership, in which case the transaction is recognized as a secured borrowing. When this is the case, the receivables remain on the financial statements of the transferor and the proceeds are considered as liability. Hence, the statement (II) is correct.
Due to higher risk involved in without recourse, transferor without recourse generally results in the payment of a higher commission that a transfer with recourse, under which the transferor retains the risk of collectability. Hence the Statement (III) is not correct.