Off-Balance-Sheet Item: Securitization of receivables

Elimination of the securitization of receivables as an off-balance-sheet item:

• Report securitized borrowing transaction
• Replace the receivables on the B/S
• Report a liability equal to the proceeds of the securitization transaction

Elimination of the securitization of receivables

Equity	→ (or small change)
Liabilities	↑
Assets	↑
Financial leverage = Total Assets / Total Equity	↑
Interest Expense (from the liability)	↑
Interest Coverage Ratio (=EBIT/Interest Expense)	↓

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(Question)
A company formed a QSPE(Qualified Special Purpose Entity) and sold a portion of its receivables account to the QSPE.

If the FASB were to retroactively eliminate the allowance of QSPEs created for the securitization of receivables, the most likely impact on the companys financial statement would be:

A. an increase in equity and an increase in interest expense.
B. no change in assets but an increase in financial leverage ratios.
C. an increase in financial leverage ratios and a decrease in the interest coverage ratio.


Answer: C