Factoring of Receivables

FACTORING

A financing method in which a business owner sells accounts receivable at a discount to a third-party funding source to raise. It is usually done either on a with recourse and without recourse.

Factoring Without Recourse

Factoring without recourse is a form of factoring, under which the bank assumes the risk of debtor’s failure to pay for the goods/services delivered. It is a transfer of financial assets that meets the criteria for derecognition. It is treated as a sale and not as a secured borrowing.

Factoring With Recourse

Factoring with recourse is a form of factoring, in which the transferor guarantees payment to the factor in the event the debtor fails to pay. It is a transfer of asset where the transferor neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset.

 

Factor’s holdback – the seller is responsible for any reduction in the collection of the receivables due to sales returns and discounts.

Casual basis service fees and interest charges is recorded as “loss on sale of receivables”.

Regular means of financing – service fees and interest charges as regular expenses.

 

Sample Problem 1: (Without Recourse)

DJ Company factored P 4,000,000 of accounts receivable to Padilla Financing Corp.on a without recourse basis on October 1, 2013. Padilla charged a 5% service fee and retained a 10% holdback to cover expected sales returns. In addition, Padilla charged a 12% interest computed on a weighted average time to maturity of the receivables of 73 days based on 365 days.




 



Entries: (casual basis)

 Cash on hand                                      3,304,000

Receivable from factor                          400,000

Loss on sale of receivable                    296,000

            Accounts receivable                                        4,000,000

(regular means of financing)

Cash on hand                                      3,304,000

Receivable from factor                          400,000

Service charge                                    200,000

Interest expense                                   96,000

            Accounts receivable                                        4,000,000

Cost of factoring for DJ Company is 296,000 equal to the service and interest charges (200,000 + 96,000).

Sample 2: (With Recourse)

Using the same information in Sample Problem 1 except that DJ Company sold the receivables on a with recourse basis. DJ Company determines that the recourse obligation has a fair value of 50,000.



 

Entries: (casual basis)

 Cash on hand                                      3,304,000

Receivable from factor                          400,000

Loss on sale of receivable                    346,000

            Accounts receivable                                        4,000,000

            Liability for recourse obligation                       50,000

(regular means of financing)

 Cash on hand                                      3,304,000

Receivable from factor                          400,000

Commission expense                            200,000

Interest expense                                      96,000

Loss on recourse obligation                   50,000

            Accounts receivable                                        4,000,000

            Liability for recourse obligation                       50,000                   

Notice: Whether the factoring is casual or as regular means of financing, the cost of factoring is the same.




Sample Problem 3: (Settlement of Factor’s Holdback)

Use the same information in the previous samples. Assume further that all of the receivables were collected except that total sales returns was 40,000.



Entries: (without recourse)

Cash on hand (squeeze)                                  360,000

Sales returns                                                      40,000

            Receivable from factor                                               400,000

(with recourse)

 Cash on hand (squeeze)                                  360,000

Sales returns                                                       40,000

            Receivable from factor                                               400,000

 

Recourse obligation                                        50,000

            Gain on recourse obligation                                        50,000