Accounting & Reporting for Factoring
The general historical approach to identifying factoring transactions on the Balance Sheet of the Factor has followed the logic of the transfer of ownership through assignment and the purchase of the invoices.
The assigned purchased invoices are therefore shown in full value as an element of the current assets of the Factoring Company. The residual amounts owed to the clients, that is, the balance of purchase price not paid in advance to the clients, is shown as a short-term liability which will be expunged when the debtors pay the Factor, who will then make those residual balances available to the clients.
This traditional model is widespread but is subject to variation in form, notably under IFRS principles which make an artificial distinction between recourse and non-recourse treatments.
Whatever the accounting requirements – and these tend to be decided upon by the factoring companies, their accountants and the custom and practice in a particular jurisdiction – the Factor is likely to have a set of reporting procedures that will characterise the client and debtor portfolios.
The Factor will use technology to identify trends and events at micro and macro level; assignment levels and days outstanding calculations by client sector and portfolio is a common example.
At a client level the Factor may monitor assignment levels, debtor concentration, dilution (the reduction in collectable debt caused by e.g. disputes or deductions), credit note levels, cash collection performance, average client life and profitability.
At a debtor level, the factor may monitor remitter creditworthiness and payment performance.
At a company portfolio level, the factor will monitor its overall volumes, collections, profitability and provisions for bad and doubtful debt. It will assess the credit risk of the portfolio and those Factors that operate within a Basel compliant environment and which operate advanced internal ratings approach will categorise risk and monitor PD, EAD and LGD figures.
The Factor will use a sophisticated array of technology tools and experiential knowledge to manage its portfolio and the range of risks inherent in providing this type of working capital finance; successful delivery requires particular understanding, awareness and sensitivity to the dynamics of receivables finance. In this way, Factoring is therefore not just another finance product but a technique that provides a win-win for both user and provider; higher and safer levels of funding for real world business, more secure and sustainable operations for the provider.