selling AR decreasing financial leverage Question

[laguna]

Hi, In reading 21 #16 EOC question is saying selling AR decreases financial leverage. I get that an asset (AR) is removed, but doesn’t the SPE pay for the receivables so cash goes up? So maybe financial leverage decreases slightly because of the the AR being sold at a slight discount to book value, but not by the amount implied in #16..
Anyone have any thoughts?

 

[Rasec]

You are right!
If you sell AR and you get cash, NADA happens!
When you consolidate the SPV you cannot simply reverse the trade. The AR serves as collateral (like debt)
So you have to accounted for it as DEBT once you consolidate the SPV. Your Leverage should go up!
** i have not looked at the question** just telling you what i know.

 

[Mosstastic]

My guess is simply because you’re selling the AR for a discount – other than that I am not sure

 

[Rasec]

• Reclassifying accounts receivable to hide liquidity or revenue collection issues. For example, in order to report lower accounts receivable balance, a company may remove account receivable from the balance sheet by selling them externally or transferring them to a controlled entity, converting them to notes receivable, or reclassifying them within the balance sheet, such as by reporting them as long-term receivables.