Factoring

De-recognition of debt from client's book

 

Under IFRS 9 (formerly FASB 166 and FRS 39), entity can de-recognised the debt from its book if it is sold on non recourse basis and subject to meeting the conditions of IFRS 9.

Hence, non recourse debt can be removed from client's book.

This is beneficial to some clients especially large companies and listed companies as:

• It reduces the company's total asset

• It improves in return on asset ratio

• It improves the DSO, an measurement of the company's good credit control

• Other intangible financial benefits arising from the reduction in total assets

• Advance from the factor is not treated as loan and hence it does not increase the client's borrowing and gearing

However, it is important to note that debt can only be de-recognized if substantially all risks are removed. The question is what is substantial. Does it means 100%? Can the debt be removed if it is 90% risk cover? The next issue is all risks. Does all risks means dispute risk must be covered as well?