Memorandum
TO:
FROM:
RE:
DATE:
The purpose of this memo is to determine whether the transfer provisions preclude sale accounting, and if so, would sale accounting be appropriate after the initial transfer if the provision in question was eliminated.

UpBeat, Inc. is a successful company located in Greenville South Carolina. Sales have substantially exceeded budgeted amounts and look to get even better. Upon reviewing of the monthly reporting package and cash flow projections it can be noted that the debt to equity ratio has deteriorated, liquidity is tight, and the company is having difficulty keeping current on taxes and on payments to suppliers and employees. In order to meet UpBeat’s debt covenants the local bank has agreed to purchase $50 million of accounts receivables following provisions included in the sale agreement:

UpBeat would like assistance in determining whether the transfer provisions preclude sale accounting. Both transfer provisions have the possibility to preclude sales accounting. Transfer provision 1 may allow for UpBeat to retain the benefit by requiring permission to sell the financial assets. It may be inferred by some that because UpBeat cannot unreasonably withhold the sale the benefit transfers to the bank, however, more information is required to properly known exactly what unreasonably withhold means. Transfer provision 2 has the possibility to allow a sale if the fixed price received for the repurchased receivable is a fair value for the price of the receivables at the time of the sale.

The following are examples of the application of effective control principles for sale accounting:
ASC 860-10-55-31: Judgment is necessary to determine whether a requirement to obtain the transferor’s permission to sell or exchange should preclude sale accounting. For example, in certain loan participation agreements involving