What is Factoring Accounting?
Factoring accounting refers to the recognition, measurement, and disclosure of transactions in which a business sells its accounts receivable to a third-party factor at a discount, typically to accelerate cash collection.
How It Works
- Determine whether the factoring is with or without recourse.
- Apply the IFRS 9 derecognition test on the receivables sold.
- If risks and rewards are substantially transferred, derecognise the receivable and record the cash and any loss on sale.
- If risks remain, keep the receivable on the balance sheet and record a financial liability for the cash received.
- Disclose the factoring arrangement, fees, and recourse exposure in the notes.
Saudi Context
Factoring is offered in Saudi Arabia by SAMA-licensed finance companies and several banks. The IFRS 9 derecognition assessment is reviewed by external auditors registered with SOCPA, and the resulting fees can be deducted for tax purposes when properly documented.
Example
A company sells SAR 1,000,000 of invoices to a factor for SAR 950,000 cash with no recourse. It derecognises the receivable, records SAR 950,000 cash, and recognises SAR 50,000 as a loss on factoring.