Factoring with and without recourse: purchased receivable or loan to the client

A factoring company's balance sheet can show either the invoices it bought, as receivables from the debtors, or a loan to its client secured on those invoices. The answer is not a matter of labelling: the transferee recognises the transferred receivables only if the transfer qualifies for derecognition by the client. Under full recourse the client keeps substantially all the credit risk, so the factor holds a loan to the client. Under genuine non-recourse factoring the factor holds receivables from the debtors. The choice drives who the credit counterparty is for ECL, staging and concentration limits, the amount of assets reported, and the regulatory and covenant ratios that depend on them.

Does the factoring agreement give the factor recourse to the client for debtor non-payment, and is that recourse full, capped, or limited to a first-loss amount? Who bears dilution risk (credit notes, returns, disputes) and late payment risk? Does the client retain any deferred purchase price, reserve or subordinated interest that absorbs losses? Are debtors notified and do they pay the factor directly? Can the factor sell or pledge the purchased receivables freely? Has the factor performed its own analysis of the risks and rewards transferred rather than relying on the client's accounting? Are the cash flows of the resulting asset solely payments of principal and interest, and is it held to collect?

1. Analyse the transfer from the client's side using the derecognition model: has the client transferred its contractual rights to the cash flows, and has it transferred substantially all the risks and rewards, retained them, or neither?
2. If the client has transferred substantially all risks and rewards (typically non-recourse, with credit risk on the debtors borne by the factor), the factor recognises the purchased receivables as its own financial assets, with the debtors as counterparties.
3. If the client retains substantially all risks and rewards (typically full recourse), the transfer fails derecognition: the factor does not recognise the debtor receivables, but recognises a receivable from the client for the cash advanced, with the invoices as collateral.
4. If the client neither transfers nor retains substantially all risks and rewards and retains control, the client applies continuing involvement; IFRS 9 does not specify the transferee's accounting in this case, so the factor needs a documented policy, commonly recognising the part of the asset it has in substance acquired and a receivable from the client for the rest, based on the contract terms.
5. Classify the resulting asset; purchased trade receivables and recourse loans to clients usually meet the hold-to-collect and SPPI conditions and are measured at amortised cost.
6. Apply ECL to the correct counterparty: the debtors for purchased receivables, the client (with the debtor receivables as collateral) for recourse loans.

Purchased receivables are measured initially at fair value, normally the price paid, plus transaction costs, and subsequently at amortised cost, with the discount accreted as interest income using the effective interest method over the expected collection period. A recourse loan to the client is measured initially at the amount advanced and subsequently at amortised cost; collections from debtors reduce the loan. In both cases the ECL measurement reflects the counterparty and the collateral: for recourse loans, expected cash flows from the pledged invoices reduce the loss given default on the client.

Disclose: (1) the accounting policy distinguishing purchased receivables from loans to factoring clients and the judgments used to make the distinction; (2) the carrying amounts of each category; (3) credit risk concentrations by debtor for purchased receivables and by client for recourse facilities; (4) collateral held in the form of pledged invoices and its effect on ECL; (5) ECL staging and loss allowance reconciliations by category.

• Recognising the face value of all invoices assigned under recourse factoring as the factor's receivables
• assuming that a contract labelled 'non-recourse' transfers credit risk even though the client guarantees debtor payment or absorbs first losses through a reserve
• measuring ECL on debtors when the factor's real exposure is to the client
• relying on the client's derecognition conclusion without analysing the contract
• reporting only debtor concentrations and ignoring concentration on large clients
• treating late-payment protection as irrelevant when it materially changes who bears the risk