Philadelphia Communications Inc. (“Philly”), developed from Sigar family, recently completed an IPO. John Sigar, CEO of Philly, is the only family member still involved in the business of Philly. The company has many notes receivable from Mr. Sigar’s cousins. Several issues will be discussed in this argument:
Mr. Sigar’s cousins are considered as “related parties”.
Notes receivable does not specify interest or payment terms for these notes.
Notes are secured by shares of Philly’s convertible preferred stock.
Analysis about the notes receivable and these issues is as follows.
Notes Receivable Presentation
Based on FASB Accounting Standards Codifications, the notes receivable should be classified as assets but separately from other receivables and related party disclosures should be provided. The reasons are as follows:
1) Receivables classification
Notes receivable arising from loans belongs to one kind of receivables in assets. According to ASC 310-10-05-4, Receivables may arise from loans and note is one form of it. Philly Inc. lends money to Mr. Sigar’s cousins. It is notes receivable to Philly while it is a loan to cousins. According to ASC 310-10-20 Glossary, “Financing Receivable” is a financing arrangement representing a contractual right to receive money and is recognized as an asset. According to ASC 505-10-45-2, reporting the note as an asset is appropriate when there is substantial evidence of ability and intent to repay within a reasonably short period of time. The Sigars are very wealthy and their preferred stock has much higher than the notes have. Besides, Mr. Sigar’s cousins have never failed to repay the notes. We can infer from these facts that there exists such a contractual right between cousins and the entity and cousins have enough ability and intent to repay notes. Thus, these notes can be classified as assets.