Factoring Without Recourse – FAQ | IFRS

Factoring without recourse

This is an illustration of how derecognition is applied in practice. The objective is to present the mechanics of applying the IFRS 9 requirements for derecognition of financial assets, starting with an analysis of the transaction using the flowchart [IFRS 9 B3.2.1], and culminating with the initial and subsequent accounting entries for both the transferor and transferee.

Background and assumptions

Entity G enters into an agreement to assign its portfolio of €20 million trade receivables without recourse to Factor H. The receivables have 60-day terms and are subject to normal warranties on the existence of the receivables at the date of transfer (for example, if a customer returns the goods purchased because they are faulty, the receivable does not exist. Entity G will pay Factor H the amount received from H for the receivable.) H pays G €19 million in cash for the receivables. There is no obligation on G to make good any shortfall on the receivables to H due to either default or late payment, and G receives no compensation from H for faster than expected payments or lower than expected levels of default. As G continues to service the receivables, the debtors have not been notified that their receivables have been transferred.

G also receives a fee of 0.2% of the notional amount of each receivable transferred for servicing the receivables.

Additional information:

  • Fair value of portfolio of trade receivables on date of transfer – €19 million
  • Carrying value of portfolio of trade receivables on date of transfer – €20million
  • The servicing fee is expected to adequately compensate entity G for servicing the receivables
  • The receivables were classified as at amortised costs

Analysis using the flowchart [IFRS 9 B3.2.1]

Step 1 Consolidate all subsidiaries

This step is not applicable in this example.

Step 2 Determine whether the derecognition model should be applied to part of a financial asset (or a group of similar financial assets) or a financial asset (or a group of similar financial assets) in its entirety.

The financial instruments being transferred have similar characteristics. They are all trade receivables, have similar credit ratings and mature at approximately the same date (60 days).

They should be assessed as a group of similar financial assets.

Step 3 Have the rights to the cash flows expired?

No, the portfolio of receivables has not yet reached maturity so the rights to the cash flows still exist.

Step 4 Is there a transfer?

Yes, entity G has assigned the rights to the cash flows from the receivables to factor H and therefore there has been a transfer under IFRS 9 3.2.4 (a). Although G has provided normal warranties, these relate to business risks of the underlying transaction – which affect the existence of the receivable – rather than to the financial risks associated with the receivable itself and do not prohibit transfer of rights to cash flows. In addition, although the debtors have not been notified that their receivables have been transferred, this does not preclude this transaction meeting the definition of a transfer, as G is only servicing the receivables and has no rights to cash flows from them.

Step 5 Risks and rewards analysis

Entity G has transferred the credit and late payment risk. G has therefore transferred substantially all the risks and rewards and should derecognise the receivables.


Transferor’s accounting

On the date of the transfer

Entity G derecognises the receivables. The difference between the carrying amount and consideration received is a gain or loss on sale.

Accounting entries on the date of the transfer

(in € millions) Factoring without recourse

DR

CR

Cash Factoring without recourse 

19

Receivables Factoring without recourse

20

Loss on sale Factoring without recourse

1

To recognise the sale of receivables and corresponding loss. There is no adjustment for the servicing, as it is adequate compensation.


Transferee’s accounting

On the date of the transfer

As entity G derecognised the receivables, factor H will recognise the receivables

(in € millions) Factoring without recourse

DR

CR

Receivables Factoring without recourse

19

Cash Factoring without recourse

19

To recognise the purchase of the receivables.

Subsequently, factor H will account for these receivables based on the appropriate classification in IFRS 9 – that is, either as at amortised cost using the effective interest method or as at fair value through profit or loss.

Helpful hint – factoring

It may be, as in this example, that the seller is not contractually obligated to repurchase the receivables once they default. However, often the seller will have the right to repurchase defaulted or overdue receivables at face value in order to maintain its customer relationships. To the extent there is an expectation that that the seller will repurchase the receivables once they stop performing, this should be factored into the risks and rewards analysis. For example, if entity G has a history of repurchasing all receivables that default, it will have retained substantially all of the default risk and it is likely that substantially all the risks and rewards have not been transferred.

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