Finance receivables are created if a company gives its customers 30 days or longer to complete payment for purchases. When the account receivable is packaged and sold to an investor, it is termed as securitization. Ford Motor decided to treat the securitization of finance receivables on December 31, 2003 and 2004, as a sale and not a collateral loan. The company had huge Finance Receivables amounting to $152,276 million in 2003 and $146,451 in 2004. It decided to take $ (46,900) and $ (35,600) as securitized receivables sold for the year 2003 and 2004 respectively (Wahlen, Baginski, and Bradshaw, 2014). Doing this enable Ford Motor to finance its activities without taking a loan. According to the criteria for the sale of receivables, the assets would be isolated from Ford Motor, the transferee would be free to exchange or pledge assets, and Ford Motor would not have control over the transferred assets.
Securitizing of accounts receivables is beneficial as it becomes a cash asset on the balance sheet and does not increase liabilities. No increase in liabilities keeps a company’s credit rating intact and there will be no monthly debt payments. Securitization of Receivables allows one to use money for current expense instead of borrowing to cover cash flow requirements (Schwarcz, 1994).
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References
Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. Nelson Education.
Schwarcz, S. L. (1994). The alchemy of asset securitization. Stan. JL Bus. & Fin., 1, 133.
