Federal Stores owns several retail store chains. On August 30, 2013, it sold all of the credit card receivables of its department store chains to Community Bank. Exhibit 12.16 reports the sale of these receivables.
a. Using information in Exhibit 12.16, discuss why the sale of credit card accounts and receivables to Community Bank likely qualified as a sale and not as a collateralized loan.
b. What are the benefits to Federal Stores, and what are the costs, of the sale of credit card accounts and receivables?


EXHIBIT 12.16 Federal Stores
Note on Sale of Receivables
Sale of Credit Card Accounts and Receivables
On August 13, 2012, Federal Stores (“the Company”) sold to Community Bank certain credit card accounts owned by the Company, together with related receivables balances, for approximately $3.6 billion cash, resulting in a pretax gain of $480 million. The net proceeds received were used to repay debt associated with various acquisitions. In connection with the sales of credit card accounts and related receivable balances, the Company and Community Bank entered into a long-term marketing and servicing agreement (“the Agreement”) with an initial term of 10 years, and, unless terminated by either party as of the expiration of the initial term, an additional renewal term of three years. The Agreement provides for, among other things, (i) the ownership by Community Bank of the accounts purchased by Community Bank from the Company, (ii) the ownership by Community Bank of new accounts opened by the Company’s customers, (iii) the provision of credit by Community Bank to the holders of the credit cards whose accounts were sold to Community Bank by the Company, and (iv) the servicing of the accounts by Community Bank.