Transfer of Financial Assets

Health Provider (the company) offers health-care-related services. To reduce administrative

obligations and to allow for additional financing options for its patients, the company enters into a health services financing agreement (the agreement) with an unrelated third-party financial institution (the bank).

Under the agreement, the companys patients have the option of requesting that the company

transfer its receivables to the bank. Once such a request is made, the following would occur:

The company would transfer the patients receivables to the bank.

The bank would pay the company the balance of the receivables in cash.

Because the bank would now hold the receivables from the patient, the patient and bank

would enter into a low-interest loan agreement to stipulate the repayment terms.

The agreement between the company and the bank contains the following additional provisions:

Repurchase obligation: the company is required to repurchase the transferred receivables

from the bank upon the occurrence of any of the following:

o There are accounts for which any payment obligation is 60 or more days past due.

o There are accounts for which the customer disputes liability for any portion of the

account.

o The agreement is terminated.

The company is also permitted to repurchase transferred receivables upon notifying the

bank that it desires to do so.

Termination payment obligation: upon the termination of the agreement, the company is

required to repurchase all transferred receivables held by the bank, unless otherwise

agreed to in writing. Either party may terminate the agreement as long as 30 days notice

is given.

Although it has not yet happened, company management believes that it will receive a

true sale opinion from its legal counsel regarding the transferred receivables.

The agreements do not prohibit the bank from transferring the receivables to another

party either as collateral for a borrowing or in an outright sale.

Required:

1. Under U.S. GAAP, what FASB Codification subtopic applies to the transfer of

receivables between the company and the bank? Elaborate.

Transfer of Financial Assets

Health Provider (the company) offers health-care-related services. To reduce administrative

obligations and to allow for additional financing options for its patients, the company enters into a health services financing agreement (the agreement) with an unrelated third-party financial institution (the bank).

Under the agreement, the companys patients have the option of requesting that the company

transfer its receivables to the bank. Once such a request is made, the following would occur:

The company would transfer the patients receivables to the bank.

The bank would pay the company the balance of the receivables in cash.

Because the bank would now hold the receivables from the patient, the patient and bank

would enter into a low-interest loan agreement to stipulate the repayment terms.

The agreement between the company and the bank contains the following additional provisions:

Repurchase obligation: the company is required to repurchase the transferred receivables

from the bank upon the occurrence of any of the following:

o There are accounts for which any payment obligation is 60 or more days past due.

o There are accounts for which the customer disputes liability for any portion of the

account.

o The agreement is terminated.

The company is also permitted to repurchase transferred receivables upon notifying the

bank that it desires to do so.

Termination payment obligation: upon the termination of the agreement, the company is

required to repurchase all transferred receivables held by the bank, unless otherwise

agreed to in writing. Either party may terminate the agreement as long as 30 days notice

is given.

Although it has not yet happened, company management believes that it will receive a

true sale opinion from its legal counsel regarding the transferred receivables.

The agreements do not prohibit the bank from transferring the receivables to another

party either as collateral for a borrowing or in an outright sale.

Required:

1. Under U.S. GAAP, what FASB Codification subtopic applies to the transfer of

receivables between the company and the bank? Elaborate.