29/08/2023
IFRS 9 Accounting for Receivables and Factoring
Receivable’s proper collection can be regarded as the major issue in order to maintain a proper working capital level. But what are the options a company has to secure its claims ?
Let me clarify something that is usually easily misinterpreted. Receivables are financial assets designated at amortized cost per IFRS 9. At recognition they are carried at Fair Value, which is usually the invoiced amount. Discounting should be made if arrangement for collection provides long term. For the short term discounting may be ignored. Prior to recognition and following IAS 18 rules any revenue and consequently receivables is prohibited if it is certain that future inflow and economic benefit will not flow in the Company.
Recently, we came across a situation where a sale recognized, generated prior to customer’s announcement that is facing serious financial difficulties. Such a sale should not be recognized at all, and thus is of high importance the risk profile that each customer has and proper evaluation should be made prior to any invoicing process. To reject a client is preferable than subsequent impairment and write it down.
However if there are no trigger events at recognition date, the entity must assess whether there is any impairment issue on an annual basis. The amount of the loss is determined by looking the carrying value and comparing it with the Present Value of the estimated cash flows discounted at the original effective interest rate. A provision should be raised.
Factoring Receivables:
The critical issue is to determine who bears the risk. The entity or the factor. There are 2 options:
Factoring with recourse: The entity bears the risk. In fact the substance is a loan from factor. Continue to recognize receivables as well as a liability owing to the factor. In fact this does not solve any situation with debtors collection, but is a form of loan, that can be granted for working capital purposes.
In recourse factoring agreement, you are responsible for buying back invoices that aren’t paid by your customers after a pre-determined period of time, which could be 60, 90 or even 120 days. The highest the buyback period the greatest for the company. In case of a period over one year, loan should be classified as a long term.
Non-recourse factoring: Factor bears the risk. Receivables should be derecognized from Balance Sheet.
Is treated as a sale. In the non-recourse agreement, the factor completely assumes the risk of non-payment by your customers, regardless of the reason. Non-recourse factoring insulates your business from the cost of bad debt, but since it is riskier for the factor, the discount rate will be higher than it is for recourse factoring.
It is a preferred method in case of real doubtful debts and should be used carefully, because the cost is high.
