Reference no: EM132828184

Accounting for the transfer of receivables with recourse remains problematic. At issue is whether such a transaction is, in substance, a sale, in which case a gain/loss is recognized, or a financing transaction, in which case any gain/loss is amortized over the original life of the receivable. (The receivable could be long-term; for example, a sale of an interest-bearing note.) SOP 74-6 concluded that most transfers with recourse are financing transactions based on the argument that a transfer of risk (i.e., no recourse) must exist for a sale to have occurred. In 1983, the FASB reached a different conclusion in SFAS No. 77. A sale is now recognized if (a) the seller surrenders control of future economic benefits embodied in the receivable and (b) the seller ' s obligation under the recourse provisions can be reasonably estimated. If these conditions are not met, the proceeds from a transfer are reported on the balance sheet as a liability.

Required:

Problem 1: What is the critical issue in interpreting the nature of this transaction? How does interpretation of the critical issue lead to the two different viewpoints?