Final answer:
Securitization of receivables is a type of secured borrowing where a company sells its outstanding invoices or receivables to a financial institution. In troubled debt restructuring, the receivable is revalued based on the discounted present value of expected cash flows at the loan's original effective rate.
Step-by-step explanation:
Securitization of receivables is a process where a company sells its outstanding invoices or receivables to a financial institution, which then issues securities backed by these receivables. It is a form of secured borrowing where the receivables serve as collateral for the securities.
In troubled debt restructuring, when a creditor modifies the original terms of a debt agreement, the receivable is revalued based on the discounted present value of the expected cash flows at the loan's original effective rate. The present value reflects the time value of money, meaning that future cash flows are discounted to their present value. By revaluing the receivable, the creditor adjusts the recorded value of the debt to reflect the modified terms.
For example, let's say a company owes $10,000 to a creditor. Due to financial difficulties, the creditor agrees to reduce the interest rate and extend the repayment period. The creditor will then discount the expected future cash flows from the modified debt using the loan's original effective rate to determine the revalued value of the receivable.