Securitization Accounting Journal Entries
Securitization involves pooling various types of debt (e.g., mortgages, car loans, credit card debt) and selling them as bonds to investors. Here's a simplified example of the accounting journal entries for securitization.
Scenario:
A company (Company A) sells a pool of receivables worth ₹1,000,000 to a special purpose vehicle (SPV) for securitization. The SPV issues securities to investors worth ₹1,000,000. Company A also retains a servicing fee of 2% annually on the receivables.
1. Initial Sale of Receivables
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|
| 2024-06-07 | Cash/Bank A/c | 1,000,000 | |
| | To Accounts Receivable A/c | | 1,000,000 |
| | (Being sale of receivables to SPV) | | |
2. Recognizing Servicing Fee Income (Assuming Servicing Fees are Earned Annually)
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|
| 2024-06-07 | Cash/Bank A/c | 20,000 | |
| | To Servicing Fee Income A/c | | 20,000 |
| | (Being recognition of annual servicing fee at 2%) | | |
3. Issuance of Securities by SPV
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|
| 2024-06-07 | Cash/Bank A/c | 1,000,000 | |
| | To Securities Payable A/c | | 1,000,000 |
| | (Being issuance of securities to investors) | | |
4. Interest Income and Distribution to Investors
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|
| 2024-12-31 | Interest Expense A/c | 80,000 | |
| | To Cash/Bank A/c | | 80,000 |
| | (Being distribution of interest to investors) | | |
Explanation:
Initial Sale of Receivables:
- Cash/Bank A/c is debited to reflect the inflow of cash from the SPV.
- Accounts Receivable A/c is credited to remove the receivables from the books of Company A.
Recognizing Servicing Fee Income:
- Cash/Bank A/c is debited to record the cash inflow from the servicing fee.
- Servicing Fee Income A/c is credited to recognize the income earned for servicing the receivables.
Issuance of Securities by SPV:
- Cash/Bank A/c is debited to reflect the inflow of cash from investors.
- Securities Payable A/c is credited to record the liability towards investors.
Interest Income and Distribution to Investors:
- Interest Expense A/c is debited to reflect the interest expense on the securities.
- Cash/Bank A/c is credited to reflect the outflow of cash to investors.
