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Question
Ajara Ltd has two receivables that it has factored to a factoring agency, the GBB Bank, in return for immediate cash proceeds of less than the face value of the invoices for the year ended 31 December 2020. Both receivables are due from long-standing customers who are expected to pay in full and on time. In addition, Ajara Ltd has agreed to a three-month credit period with both customers.
- The first receivable is for GH¢400,000, and in return for assigning the receivable, Ajara Ltd has just received from the factor GH¢360,000. Under the terms of the factoring arrangement, this is the only money that Ajara Ltd will receive regardless of when or even if the customer settles the debt; that is, the factoring arrangement is said to be “without recourse.”
- The second receivable is for GH¢200,000, and in return for assigning the receivable, Ajara Ltd has just received GH¢140,000. Under the terms of this factoring arrangement, if the customer settles the account on time, then a further GH¢10,000 will be paid by the factoring agency, the GBB Bank to Ajara Ltd, but if the customer does not settle the account in accordance with the agreed terms, then the receivable will be reassigned back to Ajara Ltd who will then be obliged to refund to the factor the original GH¢140,000 plus a further GH¢20,000. This factoring arrangement is said to be “with recourse.”
Required:
Advise the directors of Ajara Ltd on the proper accounting treatment of the monies received under the terms of the two factoring arrangements in the financial statements for the year ended 31 December 2020 in accordance with IFRS 9: Financial Instruments.
Answer
The accounting treatment of factoring arrangements depends on whether the receivables have been derecognised or not. IFRS 9: Financial Instruments provides the principles for determining whether a financial asset (such as a receivable) should be derecognised when it is transferred to a factoring agency.
First Receivable (Without Recourse):
In the first arrangement, Ajara Ltd has transferred the receivable for GH¢400,000 and received GH¢360,000 from the factor, with no further rights or obligations. This is a non-recourse factoring arrangement, meaning that the risk of non-payment (bad debt) has been transferred to the factoring agency, the GBB Bank. Since Ajara Ltd no longer bears the risk associated with the receivable, the receivable should be derecognised from its financial statements.
- Accounting Treatment:
- The receivable should be derecognised from Ajara Ltd’s statement of financial position.
- The GH¢360,000 received should be recorded as cash, and a loss on factoring of GH¢40,000 should be recognised in the statement of profit or loss.
Second Receivable (With Recourse):
In the second arrangement, Ajara Ltd has transferred the receivable for GH¢200,000 and received GH¢140,000 from the factor. However, the factoring arrangement includes a recourse provision, meaning that if the customer does not pay, Ajara Ltd remains liable and will have to refund the factor the GH¢140,000 plus an additional GH¢20,000. Since Ajara Ltd retains significant risks associated with the receivable (i.e., the risk of non-payment), the receivable should not be derecognised under IFRS 9.
- Accounting Treatment:
- The GH¢140,000 received should be recorded as a liability (loan from the factor) in Ajara Ltd’s statement of financial position.
- The receivable of GH¢200,000 should remain recognised as an asset in the statement of financial position until the risk is fully transferred or the customer settles the debt.
Summary of Accounting Treatment:
- Without Recourse (First Receivable):
- Derecognise receivable
- Recognise cash of GH¢360,000 and a loss of GH¢40,000.
- With Recourse (Second Receivable):
- Do not derecognise receivable.
- Recognise GH¢140,000 as a liability.
- Tags: Derecognition, Factoring, Financial instruments, IFRS 9, Non-recourse, Receivables, Recourse
- Level: Level 3
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