Question

Mike Tigre, Chief Financial Officer (CFO) of Medical Associates, Inc. (MAI) has come to you, the...

Mike Tigre, Chief Financial Officer (CFO) of Medical Associates, Inc. (MAI) has come to you, the controller, with the following situation and would like you to research the proper accounting for the transactions. MAI is a public company.

MAI offers health-care-related services. To reduce administrative obligations and to allow for additional financing options for its patients, MAI entered into a health services financing agreement (the “agreement”) with an unrelated third-party financial institution, First National Bank of Baton Rouge (FNB or the “bank”).

Under the agreement, MAI’s patients have the option of requesting that MAI transfer its receivables to FNB. Once such a request is made, the following will occur:

MAI will transfer the patient’s receivables to the bank.

FNB will pay MAI the balance of the receivables in cash.

Because FNB will then hold the receivables from the patient, the patient and FNB will enter into a low-interest loan agreement to stipulate the repayment terms.

The agreement between MAI and FNB contains the following additional provisions:

Repurchase obligation: MAI is required to repurchase the transferred receivables from the bank upon the occurrence of any of the following:

Accounts exist for which any payment obligation is 60 or more days past due.

Accounts exist for which the customer disputes liability for any portion of the account.

The agreement is terminated.

MAI 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, MAI is required to repurchase all transferred receivables held by FNB, unless otherwise agreed to in writing. Either party may terminate the agreement as long as 30 days’ notice is given.

MAI management believes that it will receive a “true sale” opinion from its legal counsel regarding the transferred receivables when legal counsel provides its opinion.

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.

Specifically, Mike wants you to determine whether the transfer of the patient receivables can be accounted for as a sale. He also wants an explanation of why the transferred receivables can or cannot be accounted for as a sale. Finally, if the transferred receivables cannot be accounted for as a sale, he wants you to research how MAI should account for the transferred receivables.

Homework Answers

Answer #1

In the above question the transfer of the patient receivales cannot be accounted for as sale , because as per Accounting Standard 9(India) i.e the concept of revenue recognition ,revenue is recognised at the time of sale of goods and sevices. But in the given case revenue has been already recognised at the time of treatment of patient which resulted into conversion of receivables into sale. Therefore, the receivables cannot be accounted for as sale.

Secondly, when receivables are sold to a factor /bank on recourse basis. The receivables sold will be removed from current assets in balancesheet and reflected as contingent liablity. This is due to the fact that MAI has repayment or termination obligation ,which may be dissolved, if exercised by the factor.

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