Wednesday, December 24, 2008

Pledging Receivables as Loan Collateral

If a business decides to pledge its receivables as collateral for a loan and the loan remains outstanding at the end of the accounting period, the company is required to disclose this information in the notes accompanying its current financial statements.

It is required of the business because the company has pledged assets to cover a specific liability, therefore if the business dishonors its obligations to pay the loan, the creditor has legal rights to the amount of receivables identified in the assets pledged as collateral to cover the loan.

This type of financing must be disclosed to satisfy the full-disclosure principle which informs shareholders.

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