Revenue Recognition for the MCA Industry

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This is question #6 in a 6-part interview series about Merchant Cash Advance Accounting between deBanked’s Sean Murray and Yoel Wagschal, CPA and Christina Joy Tharp.

Q: How should funders record revenue?

A:

Merchant Cash Advance AccountingThe accounting of MCA companies must not show their transactions in a way that cash advances can be seen as loans. As we all know, a lot of people in the law enforcement community wish to compare MCAs to lending companies. They would like to conclude that MCAs are lending money at a higher interest rate than is currently allowed by law.

When our firm speaks to clients in the MCA industry who continually use the loan method of accounting, it makes our firm very nervous for them. We see that MCA companies are unwittingly affirming what those law enforcement communities want to allege.

By keeping your accounting books on an established lending method of accounting, you are setting up your company for lawsuits while simultaneously setting up the industry for scrutiny. There is one thing we all must agree on: MCA companies must strive against accounting procedures that will ultimately classify them as loan sharks. If an MCA company is unsure as to how to set up their accounting so as to reflect MCA standards, please contact a knowledgeable CPA who can guide you appropriately.

In general, revenue is recognized when a specific critical event has occurred and when the amount of revenue is measurable. Every American business recognizes revenue and gains when goods and services, merchandise, or other assets are exchanged for cash (or claims to cash). However, there are a number of issues with the old US GAAP way of revenue recognition, especially for MCA companies.

A lot of companies are struggling in their attempt to establish the right path for their specific industry. What happens is that certain companies in the same industry conclude differently than other companies and this leads to inconsistencies in reporting. This is why the accounting standard setters now feel a need for new revenue recognition standards. As most accountants are aware, the new standards will be put into practice over the next two years.

Unfortunately, although the new standards reach a wide variety of industries they have not specifically addressed the MCA industry. The MCA industry has its own challenges in accounting for revenue, specifically the ‘right’ way to account for purchasing future sales. Whenever the topic comes up it soon turns into a hot debate regarding how and when to recognize revenue.

Going into all of the nuances would be too complex and truly each side of the argument may have merit. The real issue is when revenue should be recognized. One option is to recognize revenue at the time of funding. The other option is to recognize revenue on an ongoing basis (pro-rate when funds are being collected).

Here we will go back to our initial example and show the difference between the two options. All we need to change is journal entry C and journal entry D.

Here are the original entries, which show immediate revenue recognition:

(C)We provide funds to the merchant:

Accounts Debit Credit
Accounts Receivable $100,000
MCA Cash $70,000
Revenue $30,000

(D)Daily ACH from Merchant (x100):

Accounts Debit Credit
MCA Cash $1,000
Accounts Receivable $1,000

Here we use the deferred method, which show ongoing revenue recognition:

(C)We provide funds to the merchant:

Accounts Debit Credit
Accounts Receivable $100,000
MCA Cash $70,000
Deferred Revenue $30,000

(D)Daily ACH from merchant (x100):

Accounts Debit Credit
MCA Cash $1,000
Accounts Receivable $1,000
Deferred Revenue $300
Revenue $300

There are two other methods, both of which are completely incorrect and both of which our accounting firm has seen in use. The first incorrect method is when revenue is only recognized at the end – when the contract is completely paid off. This method could get your organization into real trouble. For instance, what if the contract is renewed? In those terms, a contract could renew over and over and the MCA company would never recognize the revenue. This could lead to the IRS charging you (even criminally) for tax evasion.

The second incorrect method is the loan method. This method calculates each payment’s interest and principal (similar to a conventional loan). As we outlined above, using the loan method of accounting only sets your MCA company up for scrutiny and legal action. Your own books could be used as evidence to show that your company is violating usury laws.

In conclusion, if it looks like a duck, quacks like a duck, and swims like a duck – it’s a duck! Be sure your accounting books do not paint the portrait of a loan company. Simply calling yourself a MCA company is not enough – you must be a MCA company through and through.


This interview was done with Yoel Wagschal CPA and his staff accountant Christina Tharp. They can be reached at:

Phone (845) 875-6030
Fax (845) 678-3574
Email: cjt@ywcpa.com
http://ywcpa.com


Please consult with an accountant to assess your particular situation and needs.

Last modified: May 25, 2016
Sean Murray


Category: merchant cash advance

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