ACCA FR Syllabus B. Accounting For Transactions In Financial Statements - Factoring of Receivables - Notes ^{3 / 10}

c) Explain and Account for the Factoring of Receivables

Factoring is a financial arrangement where a business sells its trade receivables (amounts owed by customers) to a third party, known as a factor, in exchange for immediate cash. This can be done with or without recourse.

✅ Benefits of Factoring:

Improves cash flow
Accelerates working capital cycle
Transfers or reduces credit risk
Outsources debt collection and credit control

Types of Factoring:

1. Without Recourse Factoring

The factor assumes full risk of customer non-payment.
The receivables are derecognised from the seller’s balance sheet.
The difference between carrying amount and cash received is treated as a gain or loss in profit or loss.

Example:

Trade receivables: £100,000
Factoring proceeds: £95,000

Journal Entry: Dr Bank £95,000 Dr Loss on disposal £5,000 Cr Trade receivables £100,000

2. With Recourse:

The company retains the risk of customer default.
Receivables remain on the books.
Cash received is treated as a loan secured on receivables.

Journal Entry: Dr Bank £95,000 Cr Loan payable (factor) £95,000

Derecognition Criteria (IFRS 9):

To derecognise receivables:

Has control of the asset been transferred?
Have substantially all risks and rewards been transferred?

✅ Yes → Derecognise
❌ No → Recognise a financial liability