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INTRODUCTION
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Accounting for Factoring SFAS No. 43 Accounting for Factoring SFAS No. 43
Objective
ELUCIDATION
01 The purpose of this statement is to deal with the accounting treatment
and disclosures of factoring transactions for both the factor and the client. Types of factoring
Following are definitions of terms used in this statement : 05 Factoring without recourse constitutes sales of receivables based on
notification. The client sells his receivables to the factor and the factor fully bears
Factoring is a type of financing in the form of a purchase or transfer of the collection risk without the right to receive payments from the client in the
receivables or short term receivables of a company resulting from business event a loss occurs due to the non-collectibility of the receivables transferred. The
transactions. customers make payments of the receivables transferred directly to the factor.
Client is the company selling or transferring the receivables. 06 In the case of factoring with recourse, the client is obligated to pay
fully (full recourse) or partly (limited recourse) the funds received from the
Factor is a financing institution or other institution purchasing or receivables transferred, or to repurchase the receivables, in case the customers do
receiving the transfer of receivables. not pay the receivables transferred on due dates.
Customers are companies having an obligation or liability to the client. 07 Factoring with recourse shall be treated as a sale of receivables if all
of the following criteria are satisfied:
Retention is that part of the factoring funds withheld by the factor as a
protection against possible adjustment to the amount of receivables before a. The client has no more future economic benefit and does not bear
maturity (for example, discount and sales return). the risk of the collectibility of the receivables.
b. the client’s obligation in the recourse agreement can be reliably estimated
Recourse is the right of the factor to receive payments from the client if c. the client has no obligation or option to repurchase the receivables.
the receivables transferred cannot be paid by the customers at the time they are
due.
Accounting of factoring for the Factor
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Accounting for Factoring SFAS No. 43 Accounting for Factoring SFAS No. 43
amounts paid to the client plus retention, constitute deferred factoring income
08 Factoring without recourse shall be recognized as factoring which shall be recognized as income during the factoring period.
receivables in the amount of receivables acquired. Any difference between the
factoring receivables and the amount of payments made to the client plus retention 14 Factoring with recourse receivables shall be presented at the net
shall be recognized as income from factoring at the time of the factoring realizable value with the retention shown as a deduction of the factoring
transaction. receivables.
09 Factoring receivables without recourse shall be presented at the net 15 Although the collectibility risk under factoring with recourse remains
realizable value, whilst retention shall be recognized as a factoring retention with the client, the factor still bears the risk of collectibility on the financing
payable and presented on the balance sheet as a liability. provided. Therefore, factoring with recourse receivables must be presented at the
net realizable value.
10 In a factoring without recourse transaction the factor shall treat the
receivables acquired from the client as a purchase of receivables. The factor 16 In a factoring with recourse, retention represents part of the loan
acquires a right and at the same time bears the risk of the collectibility of the withheld as a protection against the probability of an adjustment to the
receivables. With this purchase, the factor recognizes the receivables transferred receivables. Accordingly, the presentation of retention as a deduction of the
as an asset called account receivable factoring. On the other hand, the factor factoring receivables more reflects the real amount of the loan.
bears the risk of the collectibility of the receivables by establishing a reserve for
doubtful accounts. Accounting of factoring for the client
11 In a factoring without recourse, the factor already obtains a right on Factoring without Recourse
the receivables. Therefore, the part of funds withheld in respect of the factoring
represents a liability called account payable factoring retention. The account
payable factoring retention will decrease if there is an adjustment to the 17 Factoring without recourse shall be treated as a sale of the receivables.
receivable, for example if the client gives a sale discount and receive a return sales Any difference between the amount of receivables transferred and funds received
and the balance will be returned to the client at the time of the final settlement of plus retention shall be recognized as a loss from the factoring transaction.
the factoring.
18 Factoring without recourse is in substance a sale of receivables. The
client has no more economic benefit and no longer bears the risk on the
Factoring with Recourse collectibility of the receivables transferred. The substance of the sales of the
receivables is the reduction of the amounts of the recorded receivables and the
12 Factoring with recourse shall be recognized as a factoring receivable occurance of a loss or gain. In a factoring without recourse the client has
in the amount of receivables acquired. Any difference between the factoring transferred the collectibility risk of the receivables so that a provision for doubtful
receivables and the amount of payments made to the client plus retention shall be accounts is not needed.
recognized as deferred income during the factoring period.
19 Any loss from factoring without recourse transaction shall be
13 Factoring with recourse basically constitutes a loan with receivables recognized as an expense at the time of transaction and shall be presented in the
as collateral. Therefore, any difference between the factoring receivable and the profit and loss statement as an operating expense.
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Accounting for Factoring SFAS No. 43 Accounting for Factoring SFAS No. 43
20 Funds withheld (retention) by the factor in respect of factoring b. the total amount of factoring without recourse receivables, including
without recourse shall be recognized as a factoring retention receivable and factoring with recourse receivables that meet the sale criteria, the total of
presented on the balance sheet as current asset. factoring retention liability and factoring income and disclosures
regarding other important commitments contained in the factoring
21 In general the factor withholds part of the funds from factoring as a agreement.
protection against the probability of adjustment to the receivables transferred,
such as discount and return sales. This retention shall be returned by the factor to c. the total amount of factoring with recourse shall be disclosed as follows:
the client on maturity date and for this reason shall be recorded as a factoring
retention receivable at the time of transaction. Rp.
Factoring Receivables (xxx)
Factoring with Recourse Deferred factoring income (xxx)
Retention (xxx)
22 Factoring with recourse shall be recognized as a factoring liability in xxx
the amount of the receivables transferred. Any difference between the amount of Provision for doubtful accounts (xxx)
receivables transferred and funds received plus retention shall be recognized as Net factoring receivables xxx
interest expense during the factoring period.
d. Disclosures of important commitments dealt with in the agreement of
23 In a factoring with recourse, the client is obligated to make payments factoring with recourse cover a.o.: interest rate, maturity date and the
to the factor, if the receivables transferred were not paid by the customers on due total of receivables acquired.
date. This type of factoring is in substance as loan with the receivables as
collateral. Accordingly, the client shall recognize the factoring as a liability and
shall continue to recognize these receivables in the financial statements. Since the Disclosures by the Client
collectibility risk remains with the client, the client must present the receivables at
their net realizable values by establishing a reserve for doubtful accounts. 27 Adequate disclosures must be made in the notes to the financial
statements in respect of the following:
24 The factoring obligation shall be presented on the balance sheet in the
amount of the receivables transferred less retention and unamortized interest a. The accounting policy on factoring transactions, either without or with
expenses. recourse.
25 Retention is not an obligation in a factoring with recourse. Therefore,
the presention of retention as a reduction of the liability more reflects the real
b. The total amount of factoring with recourse receivables, transferred,
including factoring with recourse receivables that meet the sale criteria.
factoring liability.
The disclosures shall cover interest expenses, retention, maturity date, the
amount of receivables transferred and other important commitments
26 Adequate disclosures must be made in the notes to the financial
contained in the factoring agreement.
statements in respects of the following:
The total factoring with recourse liability shall be disclosed as follows:
a. the accounting policy used for factoring
Rp.
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Accounting for Factoring SFAS No. 43 Accounting for Factoring SFAS No. 43
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Accounting for Factoring SFAS No. 43 Accounting for Factoring SFAS No. 43
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Accounting for Factoring SFAS No. 43 Accounting for Factoring SFAS No. 43
Retention (xxx)
Unamortized Interest expense (xxx)
Net factoring liability xxx
Effective Date