HXM Limited (HXM) is a retailer of various fast-moving consumer goods (FMCG’s).

Due to the COVID-19 pandemic the entity has experienced reduced operating margins and liquidity concerns. As part of their process to manage liquidity concerns, they have considered factoring their accounts receivable (debtors’ book). Below is an extract from the notes to HXM’s financial statements as at 31 July 2020:

Description	2020 (R)
Trade Debtors	2 000 000
Provision for Doubtful Debts	(150 000)
Prepayments	200 000
Trade and Other Receivables	2 050 000

HXM has approached ABC Bank for assistance with the factoring transaction. Below is a brief summary of the bank’s terms:

1.) ABC will give 80% of the value of accounts receivable as at 31 July 2020 to HXM. The remaining 20% will be recovered by ABC and paid over to HXM.

2.) The fee is 7.5% of the accounts receivable amounted stated above.

In order to manage HXM’s cash flow more effectively, the CFO has expressed interest in using the Miller-Orr model. HXM invests its surplus cash at an annual rate of 7.5% and incurs R150 per transaction on buying and selling short-term securities. The expected daily cash balances and their probability distributions are as follows:

Cash (R)	Probability
80 000	15%
90 000	40%
100 000	45%

The acceptable lower limit of cash holding is R20 000.

3.1 In terms of International Financial Reporting Standards (IFRS) 9: Financial Instruments, discuss how accounts receivable should be measured in HXM’s financial statements. In addition, provide the initial journal entry (debit/s and credit/s) if HXM decided to enter into the factoring transaction.

3.2 Based on management’s forecast and using the Miller-Orr Model, calculate the target cash level HXM should hold in order to allow for effective management of their cash flows.
Below is the formula for Miller-Orr:
Optimal return point =
(3√3 x cost per order x variance of daily cash balances)/(4 x daily interest rate on marketable securities)
+
Lower cash limit