Accounting for Off-Balance-Sheet Financing

  On June 24, Year 4, a major airline entered into a revolving accounts receivable facility (Facility) providing for the sale of $489 million of a defined pool of accounts receivable (Receivables) through a wholly owned subsidi- ary to a trust in exchange for a senior certificate in the principal amount of $300 million (Senior Certif- icate) and a subordinate certificate in the principal amount of $189 million (Subordinate Certificate). The subsidiary retained the Subordinate Certificate, and the company received $300 million in cash from the sale of the Senior Certificate to a third party. The principal amount of the Subordinate Certif- icate fluctuates daily depending on the volume of Receivables sold and is payable to the subsidiary only to the extent that the collections received on the Receivables exceed amounts due on the Senior Certificate. The full amount of the allowance for doubtful accounts related to the Receivables sold has been retained, as the company has substantially the same credit risk as if the Receivables had not been sold. Under the terms of the Facility, the company is obligated to pay fees that approximate the purchaser’s cost of issuing a like amount of commercial paper plus certain administrative costs. REQUIRED The airline’s management requests your advice on the appropriate accounting for this transaction. How would you respond?