How to account for factoring or sale of receivables under IFRS?

Factoring is financing against the assignment of a monetary claim. We talk about the procedure for reflecting factoring transactions in accounting and tax accounting and in the 1C: Accounting 8 version 3.0 program in the accounting of the seller and the buyer.

The legal relations of the parties to a factoring agreement (a financing agreement for the assignment of a monetary claim) are regulated by Article 824 of the Civil Code of the Russian Federation. One party (financial agent) transfers funds to the other party (client) to offset the client's (creditor) monetary claim against a third party (debtor).

Features and advantages of factoring

A debt financing agreement for the assignment of monetary claims affects the interests of three parties: the bank (factor), the supplier (lender) and the buyer (borrower). In practice this happens as follows:

The supplier enters into an agreement with the factor and begins to prepare to sell its products.

The buyer receives goods or services in accordance with the terms of the contract.

After receiving confirmation of delivery, the factor transfers 80–90% of the amount of the concluded contract to the supplier.

The buyer gradually pays the factor for the purchased goods/services. After the payment is made in full, the supplier will receive the remaining 10–20%, and the factor will receive his commission.

Thanks to this cooperation scheme, small, medium and large businesses can work in a comfortable mode. The supplier immediately receives funds for the production of the next batch of goods (performing services), while his buyer can pay the debt with a convenient deferment. The result is stable business development.

Factoring can be with or without recourse

In the first case, responsibility for the buyer's integrity falls entirely on the supplier. This means that if the former fails to fulfill its obligations, the factor will be able to demand its funds back. The fee for servicing such a transaction is low.

If a non-recourse factoring agreement is concluded, the supplier will be fully insured against the risk of non-payment by the buyer. In this case, the factor takes responsibility for collecting the debt from the customer. The commission for such a service will be much higher.

Factoring is convenient because:

• does not require additional guarantees or collateral obligations;
• debt repayment conditions are more favorable than in many banks;
• The processing time for applications is significantly shorter than in credit institutions.

How to account for factoring or sale of receivables under IFRS?

Factoring is a fairly common form of financing for trading companies. Let's look at an example of the accounting procedure for factoring in accordance with the rules (IFRS) 9 “Financial Instruments”.

Why do you need to sell (assign) receivables?

Many companies regularly sell their accounts receivable to someone else.

There are several reasons for this:

• They need cash and don't want to (or can't) wait for their own customers to pay invoices (shipping).
• They don't want to deal with their customers' credit risk.
• They don't want to hire additional employees to call customers to remind them of deadlines and late payments. In other words, they don't want to worry about collecting accounts receivable.
• They are trying to clean up their financial statements and improve their liquidity ratios.

What is factoring?

In today's business world, factoring accounts receivable or selling accounts receivable at a discount is a common financial management practice.

Here's how it works:

Factoring payment scheme.

1. You (the food manufacturer) sell your products to customers and issue invoices.
2. Since invoices are due in 90 days (if you deal with large retail chains, then the payment terms are even longer), you cannot afford to wait for cash to arrive and sell the receivables to a factor (factoring company). Accounts receivable are sold at a discount, which represents:
   Your fee for receiving the money immediately (interest on the loan provided by the factor),
3. Revenue from the factoring company.
4. Your clients (retailers) pay their invoices directly to the factoring company.

Now the main question:

Should sold receivables be excluded from the financial statements?

It depends on the circumstances.

Essentially, you need to decide whether the conditions for derecognition of the financial asset have been met or not.

IFRS 9 Financial Instruments is very specific about derecognition. Under IFRS 9 it is much easier to recognize an asset than to derecognise it.

For this reason, IFRS 9 contains a large decision tree (paragraph B3.2.1) to help determine whether your asset should be derecognised or not:

Derecognition of financial assets under IFRS 9.

When you sell receivables, you need to evaluate whether you are transferring substantially all the risks and rewards of ownership or not.

Then, if you don't, you need to evaluate whether you maintain control over your accounts receivable or not.

There are many types of factoring agreements with different terms and conditions. There are three main types:

• Factoring without recourse - in this case, the factor buys all receivables from you without the right to return them to you (i.e., if your clients do not pay, then this is the factor's problem).
• Factoring with recourse - in this case, the factor has the right to return bad receivables to you.
• Factoring with limited recourse or factoring with a guarantee (eng. 'factoring with limited recourse') - in this case, you are guaranteed not to incur losses up to a certain amount, and the factor can return receivables only within the framework of this guarantee.

Let's look at an example of how the first two types should be taken into account.

Example of factoring accounting without recourse

ABC is a trading company. Due to a lack of cash, she decides to transfer the receivables to a factoring company for 90% of the nominal value.

The total amount of receivables transferred is CU300,000. The factor has no right to return the receivables to ABC.

How to account for this operation?

ABC transfers all the risks and rewards of the accounts receivable to the factoring company.

As a result, ABC derecognises the receivable in its entirety because the derecognition criteria under IFRS 9 are met.

Accounting entries:

• Debit. Cash: CU 270,000 (300,000 * 90%).
• Debit. Profit and loss - Finance costs (see note below): CU30,000
• Credit. Accounts receivable: CU 300,000

Note. Most of these financing costs are interest, since factoring is a form of factor lending. Therefore, if these expenses are material, you should accrue interest expense and recognize it over the financing period (rather than as a lump sum as shown here).

In this case, if clients do not pay the factor or go bankrupt, it is the factor's problem, not ABC's. This is the biggest advantage of non-recourse factoring.

On the other hand, the discount can be significantly higher than with recourse factoring.

Example of factoring accounting with recourse

Same situation as above. But this time, ABC Company transfers the receivables for 96% of the face amount.

The total amount of receivables transferred is CU300,000. The factor has every right to recover ABC's receivables if they become uncollectible.

How to account for this operation?

ABC retains some of the risks associated with the receivables transferred to the factoring company. The customers' credit risk has not been transferred because the factor has a right of repayment.

As a result, ABC retains the receivables on its balance sheet because the derecognition criteria in IFRS 9 are not met.

The amount received from the factoring company is recognized as a liability.

Accounting entry:

• Debit. Cash: CU 288,000 (300,000 * 96%).
• Debit. Profit and loss - finance costs: CU 12,000
• Credit. Repayment obligation: CU 300,000

If the client goes bankrupt and the factor applies the right of recourse, the following entries must be made:

• Debit. Repayment obligation: CU 10,000 (amount of bad receivables).
• Credit. Cash: CU 10,000

When customers pay a factor, ABC makes the following entries (based on the report provided by the factor):

• Debit. Repayment obligation: CU50,000 (the amount actually collected by the factor).
• Credit. Accounts receivable: CU 50,000

Accounting for factoring with limited recourse

The most common type of factoring falls somewhere between these two extremes described above.

Factors often require a refund guarantee up to a certain amount.

As a result, the factor is not entitled to a full refund of the face amount of the receivable, but only to the extent of the guaranteed amount.

In this case, the company partially retains control over receivables and, when transferring this debt, cannot completely derecognise it.

Accounting for factoring operations at the supplier

Since all mutual settlements are reflected in the 1C system, it is worth taking into account several features:

1For a factor, the amount of commission under an agreement with a supplier is subject to VAT. This means that the supplier company, in accordance with paragraphs. 1, paragraph 2, art. 171 of the Tax Code of the Russian Federation, receives an invoice. Subsequently, based on this document, you can receive a deduction for value added tax.

2If we take into account clause 11 of PBU 10/99, then the amount of financial services in the form of remuneration to the bank under a factoring agreement in accounting should be included in operating expenses.

3In accordance with paragraphs. 15, paragraph 1, art. 264 of the Tax Code of the Russian Federation, remuneration to the bank for the purpose of accounting for income tax must be included in non-operating expenses.

Accounting for factoring operations at the supplier is carried out as follows:

• Debit 62 Credit 90. Debt for goods sold is taken into account.
• Debit 90 Credit 68. The amount of VAT on goods supplied is reflected.
• Debit 76 Credit 91.1. The assignment of the monetary claim to the bank is recorded.
• Debit 91.2 Credit 62. The monetary claim assigned to the bank is written off.
• Debit 51 Credit 76. The bank transfers funds under a factoring agreement.
• Debit 91.2 Credit 76. The amount of bank remuneration is reflected.
• Debit 19 Credit 76. VAT is withdrawn from the bank remuneration amount.
• Debit 68 Credit 19. VAT on the remuneration amount is deducted.

Regression accounting for factoring (with the return of money to the bank) assumes that the following entries will need to be made in the accounting accounts:

1Debit 76 “Settlements with the bank” Credit 51. Return to the factor of previously transferred funds in the amount of 70–90% of the amount in accordance with the agreement.

2Debit 76.2 “Settlements on claims” Credit 76 “Settlements with the bank.” If the buyer does not pay for goods/services, a claim is filed against him.

Note that in the 1C: Accounting 8 program, starting from version 3.0.53, operations related to factoring are automated. We are talking about a subaccount on account 76. It is called: “Settlements with factoring companies.”

The main idea of ​​these transactions is that factoring is not a loan, but the sale of receivables to a bank. This procedure is accompanied by a reduction in debt and receipt of funds.

Directory settings in 1C:ERP

In 1C:ERP, accounting for settlements through a factoring company is not automated. However, the specified scheme can still be reflected using standard system documents.

To begin with, we will need to set up expense and income items to generate transactions for accounts 91.01 and 91.02:

• Setting up an income item for transferring debt to a factor:

• Setting up an expense item for writing off a client's debt transferred to a factor:

• Setting up an expense item for factor commission:

It will also be necessary to correctly configure the contract with the counterparty factor. We will use an agreement with the type of mutual settlements “With a supplier” - this option will allow us to avoid a long chain of documents to reflect the factor’s commission:

On the “Calculations” tab, we indicate the option for detailing calculations – “according to contracts”:

And a very important point - on the “Accounting Information” tab in the “Finance Group” field. accounting of settlements" we will indicate the group of financial accounting of settlements with counterparties, in which accounts for accounting of settlements for factoring are configured for account 76:

So, all the basic settings have been entered, you can start reflecting factoring operations.

1C:ERP documents for reflecting factoring operations

Accounting for factoring transactions with the buyer

If the supplier company enters into a non-recourse agreement with the factor, then it actually transfers its receivables to it. The buyer must also be notified of this step, since now he must pay for the goods or services received with the new participant in the transaction.

In order to transfer the debt from the seller to the bank, the accounting entry for factoring is performed as follows:

• Debit 60.1 (seller) Credit 60.1 (factor).
• Debit 60.1 (factor) Credit 51. This entry reflects payment.

1. Sales to the client

On September 05, services were provided to the client “Lubimy” in the amount of 500,000 rubles. Our company works with this client on deferred payment terms, and then the payment deadline under the contract is 17.10.

After being reflected in regulated accounting, the document generates entries for recording accounts receivable on account 62:

Accounting for transactions with a factoring company

The factor is a legal entity, so it also takes into account all actions related to the receipt of receivables in exchange for the provision of funds for the supply of goods or services. Banking organizations have their own accounting specifics.

Accounting entries for factoring have a number of features that will be of interest to professionals. Thus, the issuance of funds on account of assignment of debt will be reflected in the form of an entry:

• Debit 58 Credit 76 “Factoring”.
• Debit 76 Credit 51. This operation reflects the transfer of money to the seller.
• Debit 76 Credit 91.1. Posting income from a financial investment.
• Debit 91.2 Credit 58. Write-off of the amount of financial security after repayment of the debt.
• Debit 91.2 Credit 68 VAT. Calculation of VAT on the remuneration amount.

Reflecting factoring in accounting is a broad and complex topic. The methodology for these operations based on the 1C system is constantly being improved and changed, but the current legislation does not establish strict requirements for maintaining documentation. This article provides examples of how bank client reporting can be maintained.

In addition, suppliers often have questions about taxation specifics. We recommend paying attention to justifying the economic feasibility of the costs of servicing a factoring agreement (Article 252 of the Tax Code of the Russian Federation). An inflated amount of financial remuneration for signing an agreement for the assignment of receivables may attract the attention of the tax authorities.

If you have any questions about accounting when concluding a factoring agreement or you require more detailed advice on legal issues, you can always contact us in any way convenient for you. You will find telephone numbers and email addresses of our company’s offices in your city in the “Contacts” section.

Who benefits from the service and for whom it is prohibited

Please note that very often factoring companies encounter fraud when they credit non-existent suppliers or pay for non-existent deliveries. There are a lot of criminal schemes, and in order to uncover each of them, factoring verification is carried out. This is an analysis and full scan of debtors at the stage of starting cooperation. The factor contacts the supplier and his client, checks the fact and composition of the transaction, verifies deliveries, the existence of the transaction, and also makes sure of the authenticity of all documents.

Who benefits from factoring:

• Small businesses that need to increase financial turnover;
• Firms for which it is important to attract clients with flexible terms;
• If this is your first time working with clients and you are not sure of their stability. In simple words, a bank guarantee from the factoring department will allow you not to worry about the buyer’s solvency, especially in a non-recourse type of transaction.
• If goods are sold from a small supplier to a large corporation, which refuses to pay immediately. In simple words, she says “if you don’t give me a delay, I won’t buy from you” and you are forced to agree to her terms so as not to lose a major client.

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Factoring financing is prohibited in the following cases:

• If the seller has too many debtor clients;
• If you sell specific products;
• If the nature of your activity requires issuing invoices for payment after the provision of services, and not before;
• If you are in contact with subcontractors;
• If the seller and buyer are two branches of the same company;
• If the client is an individual;
• GFFA (the main document for factoring services) is not concluded with budgetary organizations.

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Basic accounting entries

The organization's cash flow from the agent is taken into account in the income that occurred on the date of conclusion of the factoring contract. When reflecting manipulations under a non-recourse factoring agreement, several main entries are made, taking into account:

1. rights of claim at the purchase price.
2. the nominal value of all rights (interest, fines...).
3. DT accounts for financial accounting. The implementation of new rights is taken into account. The totality of rights is taken into account, which is calculated in proportion to the amount of the part of the payment and the nominal price.

Money is written off from an off-balance sheet account subject to the queue specified in the initial agreement. The result is attributed to the accounting accounts from the factoring manipulations.

Calculation of basic parameters

It is better to carry out all calculations using a separate sub-account “Calculations under a factoring agreement”. By signing it, the company sells its debt. The asset is disposed of. Therefore, at the transition date, cash flows from:

• debt sales;
• expenses associated with carrying out expense transactions and sales.

If the client does not fulfill the terms of the contract, the factor has the opportunity to make a recovery.

All manipulations are subject to VAT. Banking transactions exempt from VAT are given in Art. 149. Clause 3, in which factoring actions are not indicated. Accounting factoring can be calculated using the 1C: Management program.

When calculating the main parameters, it is necessary to charge VAT on the transaction. There is also a tax on factor remuneration. After collecting the papers, the rights of claim are assigned, and the debt in favor of the agent is written off from the client. An entry is made about this in Debit 51. The supplier designates the commission and does this using the above entries. The commission is also subject to VAT. Therefore the tax is displayed.

Let's consider factoring in accounting using an example. Let's imagine that the seller gave the buyer goods worth 450 thousand rubles. The buyer must deposit the money within 60 days. The company signed an agreement with the agent to provide factoring. According to the agreement, the agent pays the seller 90% of the outstanding debt immediately, and the rest of the money after the buyer pays it. The commission is 0.3 percent.