Factoring (IFRS 9)

Factoring of trade receivables is by far the most common transaction entered into by non-financial entities that requires assessment against the IFRS 9 derecognition criteria. Surprisingly, IFRS 9 does not mention factoring in its examples. So here you are:

Example: factoring with partial recourse that qualifies for derecognition

Entity A enters into a factoring agreement and sells its portfolio of trade receivables to the Factor. The face value and carrying amount of those receivables is $1 million and selling price is $0.9 million. After the sale, Entity A absorbs first 1.8% of credit losses of the whole portfolio and the rest is absorbed by the Factor.  The average credit loss on similar receivables in the past amounts to 2% with a standard deviation of 0.2%.

First, Entity A determines that is has transferred its rights to receive the cash flows under paragraph IFRS Next, Entity A needs to assess whether it has transferred substantially all risks and rewards under paragraph IFRS In doing this analysis, Entity A calculates expected variability before and after the transfer by modelling different scenarios of credit losses with assigned probabilities based on reasonable and supportable information about past events, current conditions and forecasts of future economic conditions. Discounting in this example is ignored for the sake of simplicity.

All calculations presented in this example are available for download in an excel file. You can scroll tables presented below horizontally if they don’t fit your screen.

The variability before and after the transfer is summarised in the following tables:

Before the transfer:

Credit loss fromCredit loss toCash flowProbabilityExpected
cash flow
weighted variability

After the transfer (credit loss absorbed up to 1.8%):

Credit loss fromCredit loss toCash flowProbabilityExpected
cash flow
weighted variability

As we can see, of the original variability of $1,731, Entity A transferred $1,636 (95%) and retained $95 (5%). Therefore, Entity A concludes that it has transferred substantially all of its exposure to the variability in the amounts and timing of the net cash flows (note that no specific % threshold is given in IFRS 9). As a result, substantially all risks and rewards have been transferred and trade receivables should be derecognised. The approach to comparing exposure to variability of cash flows presented in this example is generally accepted by Big4 accounting firms.

As a result of the transaction, Entity A derecognises trade receivables and recognises a one-off derecognition loss in P/L under paragraph IFRS Additionally, Entity A needs to recognise retained credit risk as a liability (IFRS Accounting entries made by Entity A are as follows:

Derecognition of
trade receivables
Cash received900,000
Recognition of
retained credit
risk (liability)
Derecognition loss
in P/L

IFRS 9 is silent on the P/L line item in which the derecognition gain/loss should be presented. The classification in P/L should be consistent with classification of proceeds in the statement of cash flows.

See other pages relating to financial instruments:

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