Factoring fees and discount charges: interest or service revenue

Factors charge several fees: a discount charge on funds advanced, an arrangement or set-up fee, a service or administration fee often expressed as a percentage of invoice value, and sometimes credit protection or collection fees. Some are yield on the financing and belong in the effective interest rate under IFRS 9; others pay for distinct services such as sales ledger management and collection on behalf of the client and fall under IFRS 15. The split changes timing (upfront versus over the financing period), presentation (interest income versus fee income) and margin analysis, and it depends on whether the factor holds the receivables as its own or manages the client's ledger.

For each fee, what does the client receive: funding, or a separate service it could buy from someone else, such as ledger administration, credit checks on debtors, collection and reminder activity, or reporting? Does the factor own the receivables it collects (non-recourse purchase), in which case collecting them is collecting its own asset, or does it collect the client's receivables (recourse or ledger-management arrangements)? Is the arrangement fee charged to set up a facility that is likely to be used, and is it refundable? Is the service fee charged even when no funds are drawn? Are any fees charged for credit protection on debtors, and who bears the loss?

1. List each fee and identify what it compensates.
2. Discount charges calculated on funds in use over time are interest and are recognised using the effective interest method on the related financial asset.
3. Arrangement and set-up fees that are an integral part of generating the financing asset are deferred and included in the effective interest rate; where it is not probable that the facility will be used, they are recognised over the commitment period.
4. Where the factor collects receivables that it has purchased and owns, collection is not a service to the client; a fee labelled 'service fee' is in substance part of the purchase discount and belongs in the effective interest rate.
5. Where the factor manages and collects the client's own sales ledger (recourse factoring or ledger-only arrangements), the service is distinct and the fee is IFRS 15 revenue, recognised over time as the service is performed.
6. Fees for bearing debtor credit risk on receivables the factor owns are part of the yield; fees for protecting the client against debtor default on receivables the client still recognises may be a financial guarantee and are assessed under IFRS
7. 7. Accrue earned but unbilled amounts at period end and present interest income separately from IFRS 15 fee income.

Interest income is measured using the effective interest rate on the gross carrying amount of the purchased receivables or the factoring loan, including integral fees. IFRS 15 service revenue is measured at the fee allocated to the service, and recognised using a measure of progress that reflects the ledger-management and collection activity, often time elapsed over the collection period or the right-to-invoice practical expedient where the fee matches the value delivered each period. Where one fee covers both funding and service, it is split, with the IFRS 15 part based on the stand-alone selling price of the service.

Disclose: (1) the accounting policy for each type of factoring fee and the judgment on whether it is part of the effective interest rate; (2) interest income on factoring assets separately from fee and commission income; (3) disaggregation of IFRS 15 revenue by service type; (4) contract liabilities for service fees billed in advance; (5) where relevant, financial guarantees issued to clients and their ECL.

• Recognising arrangement fees and invoice-based service fees upfront as income
• treating a 'service fee' on purchased non-recourse receivables as IFRS 15 revenue although the factor is collecting its own asset
• including fees for genuine ledger-management services in the effective interest rate
• presenting all factoring income as a single line
• failing to split a bundled fee between funding and service
• ignoring that credit protection given to a client on receivables the client keeps can be a financial guarantee contract