Morse
& Morse, PLLC
1400
Old Country Road, Suite 302
Westbury,
NY 11590
Tel:
516-487-1446
Fax:
516-487-1452
Email:
morgold@aol.com
Paul Fischer,
Staff Attorney Division
of Corporation Finance August
14, 2007
Telephone
Number: 202-551-3415
Facsimile
Number. 202-7729205
Mail
Stop 3720
Re:
Anchor Funding Services, Inc.
Registration
Statement on Form 10-SB
Filed
on
April 30, 2007
File
No.
0-52589
Dear
Mr.
Fischer:
As
counsel to the above captioned corporation, the following letter is in response
to the Staff’s August 9, 2007 comment letter with respect to Anchor Funding
Services, Inc.’s Form 10/A-SB Registration Statement and how we intend to
respond to your open comments. We have both electronically filed this response
letter and have provided you with hard copy to your mail stop via
fax.
1. Comment
We
refer
to your response to prior comment 5. To help us better understand your
arrangements
and the related accounting, please provide us with an example (including
the
amounts representing the funded amount, invoice amount, factor commission,
etc.)
that provides insight into one of your factoring arrangements. Also provide
us
with the relevant journal entries recording such amounts.
Response
Please
see responses to comments 2 and 3, including the attached Exhibits which
provide
additional information on our business and related revenue recognition
accounting. If after you review our responses to Comments 2 and 3 you need
additional information please contact us.
Based
on
your comments, our research and consultation with outside professionals we
are
changing our revenue recognition policy in the next amendment. Accordingly,
we
will be amending our Form 10/A-SB filed on August 3, 2007.
2.
Comment
Tell
us
the how you applied the provisions of SFAS 140 in accounting for your
purchase
of accounts receivable and the amounts that were maintained in a reserve
account. If you believe that SFAS 140 does not apply to you, tell us why
and
refer
to the basis in literature that supports your accounting.
Response
Comment
complied with. Please see Exhibit I to this letter.
3.
Comment
We
note
that you record the factor commission as revenue once an invoice is funded.
Please note pursuant to paragraph 8 in. of SOP 01-6 that transfers of
receivables
under factoring arrangements meeting the sale criteria of paragraph 9 of
SFAS
140 are accounted for by the factor as purchases of receivables. The acquisition
of receivables and accounting for purchase discounts such as factoring
commissions should be recognized in accordance with SFAS 91 or AICPA
Practice
Bulletin No. 6, as applicable. Transfers not meeting the sale criteria in
SFAS
140
are accounted for as secured loans (that is, loans collateralized by customer
accounts or receivables). Paragraph 15 of SFAS 140 provides additional
guidance
in those situations. Factoring commissions under these arrangements should
be
recognized over the period of the loan contract in accordance with SFAS
91.
That period begins when the finance company (or an entity with financing
activities [including trade receivables]) funds a customer's credit and ends
when the customer's account is settled.
Response
Comment
complied with. Please see Exhibit II to this letter.
4.
Comment
Please
refer to prior comment 6. Please expand your disclosure on page F-13 to
include
the missing information following the two colons. In this regard, please
add the
table that is referred to in your statement, ""The following table summarizes
information about stock options as of January 31, 2007." Also, add the
information that should follow your statement, "The financial effect of these
option agreements will be recorded in the January 31, 2007 financial statements
and is anticipated to be as follows."
Response
Comment
complied with. Note 9 to the December 31, 2006 and 2005 financial statements,
has been revised appropriately to include the missing information.
5.
Comment
We
note
that your consolidated balance sheet as of March 31, 2007 is labeled as
unaudited however, your consolidated balance sheet as of December 31, 2006
is
not labeled. Please revise.
Response
Comment
complied with. Please see revised December 31, 2006 balance sheet which is
labeled audited, where it appears along side the unaudited March 31, 2007
balance sheet.
|
Very truly yours,
MORSE & MORSE, PLLC
|
||
| |
|
|
| By: | /s/ Steven Morse | |
|
Steven Morse, Managing Member |
||
Exhibit
I
Anchor
Funding Services, LLC
Memo
re: Accounting Treatment for Invoices Acquired
December
31, 2006
Facts
Anchor
Funding Services (“AFS”) is a factor for small to medium size companies located
throughout the United States. Each factoring customer must execute AFS’s
Factoring and Security Agreement (“Agreement”) before AFS will perform any
services for the customer.
The
Agreement does not require the customer to send all of its invoices to
AFS for
purchase. It is the customer’s choice/option to select the invoices they send to
AFS. Once AFS receives invoices the customer requests them to purchase,
the
Agreement does not require AFS to purchase those invoices. The Agreement
gives
AFS the choice/option to select which invoices presented to them they will
purchase.
If
AFS
does choose to purchase invoices requested by a customer, the Agreement
specifies all terms, conditions, rights and responsibilities of AFS and
the
customer. AFS makes this determination once they are satisfied the invoice
is
creditworthy. The term of the agreement varies but is usually for one year.
AFS’s customer can opt out of the Agreement, with written notice of at least
ninety days prior to the Agreement’s expiration date. If not terminated, the
Agreement automatically renews on its anniversary date.
If
AFS
decides to purchase a customer’s invoices, AFS will fund that invoice usually
within 1 to 2 days. The payment terms on substantially all purchased invoices
require payment within 30 or less days from the invoice date. AFS will
typically
fund 75% to 85% of the face value of each invoice purchased. The difference
between the funded amount and invoice amount (less the transaction fee
or
commonly known as a “factor commission” (in the Agreement, we call it an
“Initial Factoring Fee”)) is maintained in a reserve account. This reserve
protects AFS against invoice amounts that may not be collected due to dispute
or
other reasons. Once AFS collects on the purchased invoice, AFS will usually
remit any balances due to the customer within 1-2 days.
The
Agreement specifies two primary types of fees - transaction (“Initial Factoring
Fee”; factor commission) and time-based (Factoring Fee).
The
factor commission (“Initial Factoring Fee”) is computed as a percentage of the
invoice amount purchased. The percentage is specified in the Agreement
and it
varies between customers. The factor commission (“Initial Factoring Fee”) is
non-refundable, charged
for Anchor’s funding and evaluating the credit of its customers account and is
collected when the purchased invoice is funded by AFS.
Time
based fees (“Factoring
Fees”) are computed as a percentage of the invoice from the date of the funding
until AFS collects the purchased invoice. The percentage is specified in
the
Agreement and it will vary between customers. This fee is collected when
AFS
remits balances due on purchased invoices to the customer.
If
a
purchased invoice is unpaid after a specified number of days (usually after
60
or 75 days), under certain conditions, AFS may be able to present the purchased
invoice to the customer to purchase it back from AFS. The purchase price
equals
the amount AFS advanced to the customer, plus any earned Factoring Fees.
The
Agreement specifies the number of days AFS must hold a purchased invoice
before
presenting it to a customer to purchase it back. The Agreement does not
permit
AFS to submit invoices back to the customer, if the account debtor goes
out of
business usually within 45 to 60 days of AFS’s purchasing the invoice. AFS
therefore takes the credit risk of the account debtor becoming insolvent
for
this period of time.
Question
Should
AFS account for the above activity as a purchase of accounts receivable
or a
secured borrowing with a pledge of collateral?
Research
SFAS
140
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities is the authorative literature on these issues.
SFAS
140
(paragraph #9) states that a transfer of financial assets (or all or a
portion
of a financial asset) in which the transferor surrenders control over those
financial assets shall be accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets
is
received in exchange. The transferor has surrendered control over transferred
assets if and only if all of the following conditions are met:
| · |
The
transferred assets have been isolated from the transferor-put
presumptively beyond the reach of the transferor and its creditors,
even
in bankruptcy or other receivership
|
| · |
Each
transferee has the right to pledge or exchange the assets it
received, and
no condition both constrains the transferee from taking advantage
of its
right to pledge or exchange and provides more than a trivial
benefit to
the transferor
|
| · |
The
transferor does not maintain effective control over the transferred
assets
through either (1) an agreement that both entitles and obligates
the
transferor to repurchase or redeem them before their maturity
or (2) the
ability to unilaterally cause the holder to return specific assets,
other
than through a cleanup call
|
Analysis
| 1) |
The
transferred assets have been isolated from the transferor-put
presumptively beyond the reach of the transferor and its creditors,
even
in bankruptcy or other receivership
|
The
Agreement clearly specifies all invoices purchased are the property of
AFS and
AFS files a security interest in all invoices purchased. Management had
various
outside professionals draft and review the Agreement and is confident the
terms
in it will hold up if challenged.
Condition
- Met
| 2) |
Each
transferee has the right to pledge or exchange the assets it
received, and
no condition both constrains the transferee from taking advantage
of its
right to pledge or exchange and provides more than a trivial
benefit to
the transferor.
|
The
Agreement clearly specifies AFS can transfer, sell or pledge any invoices
purchased by AFS. Management had various outside professionals draft and
review
the Agreement and is confident the terms in it will hold up if
challenged.
Condition
- Met
| 3) |
The
transferor does not maintain effective control over the transferred
assets
through either (1) an agreement that both entitles and obligates
the
transferor to repurchase or redeem them before their maturity
or (2) the
ability to unilaterally cause the holder to return specific assets,
other
than through a cleanup call
|
The
Agreement specifies that the transferor has the obligation to repurchase
a
factored invoice after a specified number of days. This time frame is not
before
the maturity of the purchased invoice. In addition, AFS bears the loss
if the
Account Debtor becomes insolvent for a period of time after it purchases
the
invoice that is greater than the maturity of the invoice.
The
Agreement provides no ability to unilaterally cause the holder to return
specific assets.
Condition
- Met
Conclusion
AFS
meets
all conditions above and should account for the acquisition of their customer’s
invoices as a purchase. AFS should recognize all assets obtained and any
liabilities incurred and initially measure them at fair value.
Exhibit
II
Anchor
Funding Services, LLC
Memo
re: Accounting Treatment Non-Refundable Fees
December
31, 2006
Facts
See
Exhibit I for complete facts on AFS and conclusion that Anchor Funding
Services,
Inc. (AFS) should account for the acquisition of their customer’s invoices as a
purchase under SFAS No. 140.
Question
How
should AFS account for the non-refundable fee (factoring commission (“Initial
Factoring Fee”))?
Research
The
appropriate literature on this topic consists of the following:
1)
SOP
01-6 Accounting by Certain Entities (Including Entities with Trade Receivables)
That Lend to or Finance the Activities of Others
2)
AICPA
Practice Bulletin No. 6 - Amortization of Discounts on Certain Acquired
Loans
3)
SFAS
91 Accounting for Nonrefundable Fees and Costs Associated with Originating
or
Acquiring Loans and Initial Direct Costs of Lease
Paragraph
8(m) of SOP 01-6 states the following:
| m. |
Factoring
Arrangements.
Transfers of receivables under factoring arrangements meeting
the sale
criteria of paragraph 9 of FASB Statement No. 140 are accounted
for by the
factor as purchases of receivables. The acquisition of receivables
and
accounting for purchase discounts such as factoring commissions
should be
recognized in accordance with FASB Statement No. 91 or AICPA
Practice
Bulletin No. 6, Amortization
of Discounts on Certain Acquired
Loans.
|
Paragraph
13 of AICPA Practice Bulletin No. 6 states the following:
At
the
time of acquisition, the sum of the acquisition amount of the loan and
the
discount to be amortized should not exceed the undiscounted future cash
collections that are both reasonably estimable and probable. The discount
on an
acquired loan should be amortized over the period in which the payments
are
probable of collection only if the amounts and timing of collections, whether
characterized as interest or principal, are reasonably estimable and the
ultimate collectibility of the acquisition amount of the loan and the discount
is probable. If these criteria are not satisfied, the loan should be accounted
for using the cost-recovery method.
Paragraph
15 of SFAS No. 91 states the following:
The
initial investment in a purchased loan or group of loans shall include
the
amount paid to the seller plus any fees paid or less any fees received.
The
initial investment frequently differs from the related loan’s principal amount
at the date of purchase. This difference shall be recognized as an adjustment
of
yield over the life of the loan. All other costs incurred in connection
with
acquiring purchased loans or committing to purchase loans shall be charged
to
expense as incurred.
Analysis
Since
AFS’s acquisition of receivables is considered a purchase of receivables its
factoring commissions need to be accounted for under AICPA Practice Bulletin
No.
6 or SFAS No. 91 as appropriate.
AICPA
Practice Bulleting No. 6 addresses purchase discounts on acquired loans.
These
situations occur when an entity acquires loans for a discount and then
is
entitled to receive the entire loan balance. The difference between the
purchase
price and full loan amount is the purchase discount. A common characteristic
of
these transactions is that the seller never receives an amount in excess
of the
face value of the loans sold.
SFAS
No.
91 addresses fees received when loans are purchased. These situations occur
when
an entity buys loans for a fee. The acquiring entity then continues to
receive
payments (principal and interest) over the life of the loan. The fee is
amortized over the life of the loan. In these transactions, the seller
can
receive more than the face value of the loans.
Conclusion
AICPA
Practice Bulletin No. 6 is more appropriate revenue recognition for AFS’s
non-refundable fees. SFAS No. 91 discusses situations where an acquiring
entity
may pay an amount in excess of the face value of the loaned amounts. This
is an
activity AFS would never do.
To
comply
with AICPA Practice Bulleting No. 6, upon purchasing an invoice AFS will
determine that the acquisition cost less discount (non-refundable fee)
will
exceed the undiscounted future cash collections that are reasonably estimable
and probable.
AFS
does
appropriate credit analysis prior to funding an invoice and believes the
amounts
to be collected will be in excess of their purchase price.
AFS
must
determine if the non-refundable fee should be amortized over the period
in which
payments are probable or collection or if the cost-recovery method is must
be
used.
The
non-refundable fee can be amortized over the period in which payments are
probable of collection only if:
| 1) |
Amounts
to be collected, whether characterized as interest or principal,
are
reasonably estimable
|
| 2) |
Timing
of collections, whether characterized as interest or principal,
are
reasonably estimable
|
| 3) |
Ultimate
collectibility of the acquisition amount and discount are
probable.
|
AFS
meets
conditions 1 and 3, but not condition 2.
AFS
can
not reasonably estimate the timing of the collection of the invoices purchased.
AFS’s customers are in various industries and many factors influence the timing
of when the debtors will pay the invoice AFS has purchased.
AFS
will
recognize revenue on its non-refundable factoring commissions (Initial
Factoring
Fee”) using the cost recovery method.
An
example of our non-refundable fee (factoring commission “Initial Factoring
Fee”)) revenue recognition under the following assumptions would be as
follows:
Invoice
amount purchased - $10,000
Factor
commission (“Initial Factoring Fee”) - 1%
Date
Acquired - 7-1-07
Date
Collected - 8-20-07
For
the
month of July 2007 no revenue would be recognized. Our July 2007 balance
sheet
would consist of the following for this transaction:
|
Retained
Interest in Purchased Accounts Receivable
|
$
|
10,000
|
||
|
Deferred
Factoring Commissions
|
(100
|
)
|
||
|
Retained
Interest in Purchased Accounts Receivable, net
|
$
|
9,900
|
For
the
month of August 2007 our income statement would include the factoring commission
for this transaction as follows:
| Factoring Commission (“Revenues”) |
$
|
100
|
Our
August 31, 2007 balance sheet would include no amounts for this
transaction.