ASU 2016-15 and GAAP Treatment of Securitization-Related Cash Flows

By Cecil W. Jackson, PhD, CPA (Inactive) and David M. Jackson, JD

The securitization of trade receivables is a multibillion-dollar sector, and it is growing. It is vitally important that U.S. GAAP correctly reflect the economics of these transactions. This article argues that, in essence, cash inflows resulting from a transferor’s beneficial interest in the securitization of its trade receivables are inflows from operating activities. Importantly, and for very good reason, investors generally regard cash inflows from operating activities more highly than cash inflows from investing activities.

Securitization of Accounts Receivable

Accounting Standards Update (ASU) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, included a change in the reporting of cash receipts from the securitization of financial assets and the securitization of accounts receivable. The standard states, “Cash receipts from payments on a transferor’s beneficial interest in securitized trade receivables should be classified as cash inflows from investing activities.”

Typically, when a company securitizes its receivables, it transfers the receivables into a special purpose vehicle (SPV), which issues notes to investors backed by the cash flows generated by such receivables. The initial payment amount to the transferor often requires the transferor to “have some skin in the game,” in the sense that it receives further payment depending upon the extent to which the receivables are collected. In other words, in addition to receiving the initial payment upon the transfer of the receivables, it also receives a “beneficial interest” (or what is sometimes characterized as a “deferred purchase price”) in the collection of the receivables, to the extent that such collection exceeds specified payment amounts to third-party investors in the securitized receivables. This beneficial interest could be in the form of the transferor of the receivables holding a residual equity interest in the SPV, or in the form of holding the most subordinate tranche of the securitized receivables. Either way, the transferor receives an initial payment plus a beneficial interest or a right to receive possible future payments.

Operating Activities or Investing Activities?

There is no issue as to where the initial payment amount to the Warren online payday advance transferor of the receivables should be disclosed in the transferor’s statement of cash flows; clearly, that amount must go into the cash flow from operating activities (CFFO) section, as ASU 2016-15 states. ASC Topic 230, “Statement of Cash Flows,” defines CFFO as cash received from activities that “include delivering or producing goods for sale and providing services.”

Of course, cash receipts from trade receivables do arise from these activities. ASU 2016-15 requires, however, that the cash receipts from payments, in respect of the transferor’s beneficial interest in the securitized receivables, must be disclosed as cash flows from investing activities (CFFI). The authors dispute this requirement: CFFI typically consists of cash flows from selling or buying long-term assets, or selling or buying investments (securities) in other entities that are not specifically acquired for resale. The cash received from a beneficial interest in securitized trade receivables is not analogous to either of these typical CFFI activities.

In the case of typical investments in other companies, the cash being used has already been received by the entity, and the receipt of that cash has already been recorded as a CFFO, a CFFI, or a cash flow from financing activities. As that cash is later spent on an investment in another company, it is then correctly recorded as a cash outflow on an investing activity. When the investment in another company is sold, the cash receipt is properly recorded as a cash inflow from an investing activity. This is very different from the receipt of the proceeds from the beneficial interests in securitized receivables, which arose from “delivering or producing goods for sale and providing services,” which had not yet been recorded as any kind of cash flow.