Last update 10/12/2019
Factoring and reverse factoring – There is no specific guidance in IFRS on the classification of cash flows from traditional factoring or reverse factoring arrangements.
Introduction
Traditional factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs. Unlike traditional factoring, where a supplier wants to finance its receivables, reverse factoring (or supply chain financing) is a financing solution initiated by the ordering party (the customer) in order to help its suppliers to finance its receivables more easily and at a lower interest rate than what would normally be offered. Factoring and reverse factoring
Under traditional factoring receivables are considered “sold”, under IFRS 9, when the buyer has “no recourse”. Moreover, to treat the transaction as a sale under IFRS, the seller’s monetary liability under any “recourse” provision must be readily estimated at the time of the sale. Otherwise, the financial transaction is treated as a secured loan, with the receivables used as collateral.
When a non-recourse transaction takes place, the accounts receivable balance is removed from the statement of financial position. The corresponding debits include the expense recorded on the income statement and the proceeds received from the factor. Factoring and reverse factoring
Some factoring arrangements do not result in an accounting derecognition, eg if the seller legally transfers the rights to the cash flows to a factoring company but retains the bad debt risk by providing a guarantee. Whether legal form sales of this nature should be taken into account when assessing the business model is not specifically addressed in IFRS 9 and consequently, this is likely to be an area of judgment and accounting policy choice. This is because the arrangement changes how the seller generates cash flows, ie the seller receives a cash payment immediately from the factor, with the factor being entitled to the contractual cash flows from the receivables. Factoring and reverse factoring
This means that when assessing the business model, some entities will choose to include legal form sales under which the rights to cash flows from the trade receivables have been transferred to another party, whereas other entities will choose to only include sales that meet the accounting derecognition requirements.
In respect of reverse factoring arrangements there is no situation of receivables being “sold” under IFRS 9, reverse factoring is primarily a financing arrangement on the balance sheet.
How factoring interacts with the new classification model Factoring and reverse factoring
Under IFRS 9, a financial asset is classified based on two criteria: Factoring and reverse factoring
- The business model within which it is held Factoring and reverse factoring
- Whether its contractual cash flows meet the solely payments of principal and interest (SPPI) test. Factoring and reverse factoring
Under IFRS 9, an accounting derecognition is considered a sale for the purposes of assessing the business model; consequently, factoring that results in derecognition must be taken into account as part of the assessment. Factoring and reverse factoring
This means that entities that factor some or all of their trade receivables may be unable to conclude that those receivables are part of a ‘hold to collect’ business model which would preclude amortised cost classification (even if the SPPI test is met). This means that classification at Fair Value through Other Comprehensive Income (FVOCI) or at Fair Value through Profit or Loss (FVPL) may be required.
Cash flow presentation
If receivables are factored without recourse, then the proceeds from the factor should be classified as part of operating activities even if the entity does not enter into such transactions regularly.
If receivables are factored with recourse and the customer remits cash directly to the factor, then the following approaches are acceptable and should be applied consistently.
- Single cash flow approach: Present a single financing cash inflow or a single operating cash inflow for the proceeds received from the factor against receivables due from the entity’s customers. An entity applies judgement in determining the appropriate classification, based on the nature of the activity to which the cash inflow relates.
- Gross cash flows approach: Present a financing cash inflow for the proceeds received from the factor, followed by an operating cash inflow when the factor collects the amounts from the customer in respect of goods or services sold by the entity and a financing cash outflow for settlement of amounts due to the factor.
If receivables are factored with recourse and the customer remits cash directly to the entity, then the entity follows the gross cash flows approach.
In a reverse factoring arrangement, a factor agrees to pay amounts to a supplier in respect of invoices owed by the supplier’s customer and receives settlement from that customer (the entity) at a later date. In general, the following approaches to presenting cash flows are acceptable and should be applied consistently.
- Single cash flow approach: Present a single operating cash outflow or a single financing cash outflow for the payments made to the factor. An entity applies judgement in determining the appropriate classification, based on the nature of the activity to which cash flow relates.
- Gross cash flows approach: Present a financing cash inflow and an operating cash outflow when the factor makes a payment to the supplier in respect of the purchase of goods or services made by the entity, together with a financing cash outflow for settlement of amounts due to the factor.
See also: https://www.ifrs.org
