VALUATION OF RECEIVABLES
The valuation of receivables on the balance sheet is presented in the amount of the due payment, while maintaining the
principle of prudence. The nominal value is reduced by revaluation write-downs which gives the realistically assessed
payment amount.
Trade receivables/debtors fall into the category of loans and receivables under IAS 39/FRS 26. They will be valued at fair
value initially - which will be the invoiced amount. Because they are short-term receivables they will not normally be
subject to discounting, nor will they normally have an effective interest rate. They will have to be assessed for impairment
at each balance sheet date, and will be impaired if the present value of the cash flows is less than the carrying amount
Disposing of Receivables
A company can sell its accounts receivables to a finance company. The finance company will charge the seller a factoring
fee and take ownership of the receivables. In this case, the finance company assumes the risk of bad debts
How to Account for Debt Factoring or Selling of Receivables
Accounts receivable factoring, often referred to as invoice discounting, is a type of short-term debt financing
used by some business borrowers. The transaction takes place between a business (the borrower) and a lender
(often a factoring company as opposed to a traditional commercial bank).
A management team may choose to sell or assign this account receivable (or a specific invoice) to a factoring
company at a discount to its face value in exchange for cash. The transaction permits the borrower to have
cash today instead of waiting for the payment terms to be settled in the future.
Aside from the advantage of getting cash upfront, accounts receivable factoring is also commonly employed as
a strategy to transfer payment risk to another party.
Types of Accounts Receivable Factoring
1. Recourse vs. Non-Recourse Factoring
Recourse means that should a borrower’s customer not pay, the factoring company will retain “recourse” over
the borrower (the vendor), meaning they can demand repayment. Non-recourse factoring means that the
factoring company is out of pocket should the vendor’s buyer not settle its invoice.
2. Notification vs. Non-Notification
In a notification deal, the borrower’s buyer would be notified of the transaction, meaning that the company’s
payable team would be contacted with new payment instructions by the factoring company. In a non-
notification deal, the buyer is completely unaware of the vendor’s financing arrangement with the factoring
company.
3. Regular vs. “Spot”
In a spot deal, the vendor and the factoring company are engaging in a single transaction. In what’s called
a regular factoring arrangement, the factoring company will have an ongoing relationship with its borrower and
they likely have an approved limit, which can be drawn, repaid, and redrawn again – based on newly issued
invoices.
All else being equal, regular, recourse, and notification deals are less risky for a lender (or a factoring company);
non-recourse, non-notification, and spot deals are more risky.
Advantages of Factoring Receivables
• Fast funding. Working with a bank or other lender to get access to funds can take weeks or even
months, and involve a bunch of paperwork.
The valuation of receivables on the balance sheet is presented in the amount of the due payment, while maintaining the
principle of prudence. The nominal value is reduced by revaluation write-downs which gives the realistically assessed
payment amount.
Trade receivables/debtors fall into the category of loans and receivables under IAS 39/FRS 26. They will be valued at fair
value initially - which will be the invoiced amount. Because they are short-term receivables they will not normally be
subject to discounting, nor will they normally have an effective interest rate. They will have to be assessed for impairment
at each balance sheet date, and will be impaired if the present value of the cash flows is less than the carrying amount
Disposing of Receivables
A company can sell its accounts receivables to a finance company. The finance company will charge the seller a factoring
fee and take ownership of the receivables. In this case, the finance company assumes the risk of bad debts
How to Account for Debt Factoring or Selling of Receivables
Accounts receivable factoring, often referred to as invoice discounting, is a type of short-term debt financing
used by some business borrowers. The transaction takes place between a business (the borrower) and a lender
(often a factoring company as opposed to a traditional commercial bank).
A management team may choose to sell or assign this account receivable (or a specific invoice) to a factoring
company at a discount to its face value in exchange for cash. The transaction permits the borrower to have
cash today instead of waiting for the payment terms to be settled in the future.
Aside from the advantage of getting cash upfront, accounts receivable factoring is also commonly employed as
a strategy to transfer payment risk to another party.
Types of Accounts Receivable Factoring
1. Recourse vs. Non-Recourse Factoring
Recourse means that should a borrower’s customer not pay, the factoring company will retain “recourse” over
the borrower (the vendor), meaning they can demand repayment. Non-recourse factoring means that the
factoring company is out of pocket should the vendor’s buyer not settle its invoice.
2. Notification vs. Non-Notification
In a notification deal, the borrower’s buyer would be notified of the transaction, meaning that the company’s
payable team would be contacted with new payment instructions by the factoring company. In a non-
notification deal, the buyer is completely unaware of the vendor’s financing arrangement with the factoring
company.
3. Regular vs. “Spot”
In a spot deal, the vendor and the factoring company are engaging in a single transaction. In what’s called
a regular factoring arrangement, the factoring company will have an ongoing relationship with its borrower and
they likely have an approved limit, which can be drawn, repaid, and redrawn again – based on newly issued
invoices.
All else being equal, regular, recourse, and notification deals are less risky for a lender (or a factoring company);
non-recourse, non-notification, and spot deals are more risky.
Advantages of Factoring Receivables
• Fast funding. Working with a bank or other lender to get access to funds can take weeks or even
months, and involve a bunch of paperwork.
