Here are some excerpts from the model solution to UpBeat that discuss four possible alternative solutions to the issues raised in this case.
For each of the transfer provisions included in the agreement, determine whether the provision would preclude sales accounting.
Alternative 1 — Fail sale accounting criteria because of Transfer Provision 1.
ASC 860-10-40-5(b) requires that the bank have the right to pledge or exchange the accounts receivable it received and that no condition both “constrains [the bank] from taking advantage of its right to pledge or exchange [the receivables and] provides more than a trivial benefit” to UpBeat Inc. Transfer Provision ...view middle of the document...
. . that it is probable” that UpBeat will be required to repurchase. Given these criteria, the repurchase option maintains UpBeat’s effective control over the transferred accounts receivable.
Alternative 3 — Both transfer provisions meet sale accounting criteria.
Neither of the transfer provisions in the sale agreement prohibits UpBeat from accounting for the transfer of accounts receivable as a sale. Transfer Provision 1 is permitted because UpBeat states it would not unreasonably withhold permission from the bank to sell or pledge the accounts receivable. Transfer Provision 2 is permitted because the option to repurchase the accounts receivable has been established at a fixed price upon entering into the sales agreement.
Alternative 4 — Both transfer provisions fail sale accounting.
As described in Alternatives 1 and 2, both of the transfer provisions in the sale agreement prohibit UpBeat from accounting for the transfer of accounts receivable as a sale.
If one or more of the provisions preclude sale accounting, but subsequently, after the transfer, UpBeat and the local bank amend the agreement to eliminate the provision(s) in question, would sale accounting be appropriate after the initial transfer?
Alternative 1 — No.
Sale accounting treatment under ASC 860-10-40 is determined only at the inception of the transaction and cannot be reconsidered.
Alternative 2 — Yes.
Transfers under ASC 860-10-40 are evaluated not only at the time they are executed but also in subsequent periods.