From the CFAI EOCs:
“Supreme Healthcare recently announced it had formed a special purpose entity through which it plans to sell up to $100 million of its accounts receivable.”
If Supreme Healthcare sells its receivables to the SPE, the consolidated financial statement will most likely show:
A) a higher revenue for 2010
B) the same cash balance at 31 Dec 2010
C) the same accounts receivable balance at 31 Dec 2010
The answer is C. What I don’t understand is why the cash balance would change on consolidation?
You get cash from financing the receivable on the parent company, that cash comes from debt on the SPE, which is also consolidated. So you increase your cash through selling the A/R to investors (Debt).
On the balance sheet, you get a net effect of more cash and offset with a liability.
OK, so if the SPV raised $100m cash from issuing debt and then bought the receivables for this amount, Supreme Healthcare’s cash balance would increase by 100m and it would lose its receivables.
This is all before consolidation though.
On consolidation, there would still be no net change in cash. There would be an increase in debt and this would be offset be the re-recognition of the receivables.
Thoughts?
Debt is increased by $100m, offset by a $100m increase in cash to finance the recievable securitization. The A/R account is left as is as part of consolidation.
Stand alone: Company is +100m cash, -100m A/R
SPE: +100m A/R, +100m Debt
Consolidated: +100m cash, +100 Debt.