I sold my unpaid invoices to a factoring company — how do I record the advance, the fee and the holdback so my receivables and revenue stay right?

Recording the cash advance

The transferor and transferee must account for a transfer as a secured borrowing with pledge of collateral if a transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in exchange for cash or other consideration (other than beneficial interests in the transferred assets) does not meet the conditions for a sale in paragraph 860-10-40-5, or if a transfer of a portion of an entire financial asset does not meet the definition of a participating interest. (jurisdiction: United States, entity_scope: Nongovernmental entities applying U.S. generally accepted accounting principles (the FASB Accounting Standards Codification), accounting_basis: U.S. GAAP (FASB Accounting Standards Codification, Topic 860 Transfers and Servicing), effective_from: First annual reporting period beginning after November 15, 2009 (ASC 860-10-65-3(a)))

“If a transfer of financial assetsan entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in exchange for cash or other consideration (other than beneficial interests in the transferred assets) does not meet the criteriaconditions for a sale in paragraph 860-10-40-5,860-10-40-5 If a transfer of a portion of an entire financial asset does not meet the definition of a participating interest. the transferor and transferee shall account for the transfer as a secured borrowing with pledge of collateral.”

Upon a transfer accounted for as a sale, the transferor must recognise all assets obtained and liabilities incurred in consideration as proceeds of the sale, including (the list being introduced by “including”) cash, put or call options held or written such as guarantee or recourse obligations, forward commitments, swaps, and servicing assets and servicing liabilities if applicable. (jurisdiction: United States, entity_scope: Nongovernmental entities applying U.S. generally accepted accounting principles (the FASB Accounting Standards Codification), accounting_basis: U.S. GAAP (FASB Accounting Standards Codification, Topic 860 Transfers and Servicing), effective_from: First annual reporting period beginning after November 15, 2009 (ASC 860-10-65-3(a)))

“Recognize all assets obtained and liabilities incurred in consideration as proceeds of the sale, including all of the following: 1. Cash 2. Put or call options held or written (for example, guarantee or recourse obligations) 3. Forward commitments (for example, commitments to deliver additional receivables during the revolving periods of some securitizations) 4. Swaps (for example, provisions that convert interest rates from fixed to variable) 5. Servicing assets and servicing liabilities, if applicable (see Subtopic 860-50).”

The proceeds from a sale of financial assets consist of the cash and any other assets obtained, including beneficial interests and separately recognized servicing assets, less any liabilities incurred, including separately recognized servicing liabilities; any asset obtained that is not an interest in the transferred asset is part of the proceeds, and any liability incurred, even if related to the transferred financial assets, is a reduction of the proceeds. (jurisdiction: United States, entity_scope: Nongovernmental entities applying U.S. generally accepted accounting principles (the FASB Accounting Standards Codification), accounting_basis: U.S. GAAP (FASB Accounting Standards Codification, Topic 860 Transfers and Servicing), effective_from: First annual reporting period beginning after November 15, 2009 (ASC 860-10-65-3(a)))

“The proceeds from a sale of financial assets consist of the cash and any other assets obtained, including beneficial interests and separately recognized servicing assets, in the transfer less any liabilities incurred, including separately recognized servicing liabilities. Any asset obtained that is not an interest in the transferred asset is part of the proceeds from the sale. Any liability incurred, even if it is related to the transferred financial assets, is a reduction of the proceeds.”

Upon completion of a transfer of an entire financial asset or a group of entire financial assets that satisfies the conditions in paragraph 860-10-40-5 to be accounted for as a sale, the transferor (seller) must derecognise the transferred financial assets, apply paragraphs 860-20-25-1 and 860-20-30-1 on recognition and measurement of assets obtained and liabilities incurred in the sale, and recognise in earnings any gain or loss on the sale. (jurisdiction: United States, entity_scope: Nongovernmental entities applying U.S. generally accepted accounting principles (the FASB Accounting Standards Codification), accounting_basis: U.S. GAAP (FASB Accounting Standards Codification, Topic 860 Transfers and Servicing), effective_from: First annual reporting period beginning after November 15, 2009 (ASC 860-10-65-3(a)))

“Upon completion of a transfer of an entire financial asset or a group of entire financial assets that satisfies the conditions in paragraph 860-1040-5 to be accounted for as a sale, the transferor (seller) shall:[FAS 140, paragraph 11, sequence 96] a. b. c. Derecognize the transferred financial assets[FAS 140, paragraph 11, sequence 98] Apply the guidance in paragraphs 860-20-25-1 and 860-20-30-1 on recognition and measurement of assets obtained and liabilities incurred in the sale[FAS 140, paragraph 11, sequence 100] Recognize in earnings any gain or loss on the sale[FAS 140, paragraph 11, sequence 101]”

Not established from an authoritative source.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.

Recording the finance company's fee or discount

See The proceeds from a sale of financial assets consist of the cash and any other assets obtained, including beneficial interests and separately recognized servicing assets, less any liabilities incurred, including separately recognized servicing liabilities; any asset obtained that is not an interest in the transferred asset is part of the proceeds, and any liability incurred, even if related to the transferred financial assets, is a reduction of the proceeds.

In the text's illustrative entry, the whole $20,000.00 fee is recorded as Interest Expense on the transfer date (Oct. 1, 20X1) rather than being spread over the period to collection, with Checking recorded at $205,000.00 on that same date. (jurisdiction: United States, entity_scope: Illustrative example only (Larkin Co., transfer without recourse), accounting_basis: Accrual-basis financial accounting as taught in this US GAAP-oriented introductory course text, conditions: Stated only as an illustrative worked example (Larkin Co., $250,000 of receivables, 8% fee, $15,000 allowance retained); the text says the scenario 'is only for the purpose of comparing the two types')

“ Journal Page 1 Date Description Post. Ref. Debit Credit 20X1 Oct. 1 Checking 205,000.00 Oct. 1 Interest Expense 20,000.00 Oct. 1 Due from Factor 15,000.00 Oct. 1       Accounts Receivable 250,000.00 Oct. 1 Receivables sold to factor at a discount ”

The article states that the "loss on sale of receivables" is not really a loss, but a combination of interest expense related to the early receipt of cash and the shifting of the risk of bad debt loss to the factor. (jurisdiction: US (not stated in the article; the publisher is a US accounting/CPE publisher and the illustration is denominated in US dollars), entity_scope: A seller of receivables under a factoring arrangement, conditions: Characterisation given in the article's discussion of its own example; the two components named are interest expense and the shifting of bad debt risk, and the article does not present this as a closed or exhaustive analysis)

“However, the "loss on sale of receivables" is not really a loss - it is a combination of interest expense related to the early receipt of cash, and the shifting of the risk of bad debt loss to the factor, so a more precise entry of the same transaction might be (assuming a $2,000 factoring fee to cover the risk of bad debt losses):”

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.

The holdback: where it sits until it is released

In the text's worked example, a company transferring $250 thousand of receivables without recourse pays an 8% fee and, in addition to that fee, the factor keeps an allowance of $15,000 to cover bad accounts. (jurisdiction: United States, entity_scope: Illustrative example only (Larkin Co., transfer without recourse), conditions: Stated only as an illustrative worked example (Larkin Co., $250,000 of receivables, 8% fee, $15,000 allowance retained); the text says the scenario 'is only for the purpose of comparing the two types')

“For example, take the following situation: On October 1, Larkin Co. transfers $250 thousand of receivables, without recourse, and pays an 8% fee. In addition, the factor keeps an allowance of $15,000 to cover bad accounts.”

In the text's illustrative entry at the date of transfer, the $15,000 the factor keeps back is recorded by the transferring company in a 'Due from Factor' account for $15,000, while Accounts Receivable is removed for the full $250,000.00 transferred, the entry being described as 'Receivables sold to factor at a discount'. (jurisdiction: United States, entity_scope: Illustrative example only (Larkin Co., transfer without recourse), accounting_basis: Accrual-basis financial accounting as taught in this US GAAP-oriented introductory course text, conditions: Stated only as an illustrative worked example (Larkin Co., $250,000 of receivables, 8% fee, $15,000 allowance retained); the text says the scenario 'is only for the purpose of comparing the two types')

“ Journal Page 1 Date Description Post. Ref. Debit Credit 20X1 Oct. 1 Checking 205,000.00 Oct. 1 Interest Expense 20,000.00 Oct. 1 Due from Factor 15,000.00 Oct. 1       Accounts Receivable 250,000.00 Oct. 1 Receivables sold to factor at a discount ”

There will be some kind of deadline on a factoring agreement. (jurisdiction: United States, entity_scope: Factoring agreements as described by this text)

“There will be some kind of deadline on the agreement.”

In the text's illustrative without-recourse case, at the agreement's end date the $15,000.00 Due from Factor balance is cleared against Allowance for Doubtful Accounts of $15,000.00, in an entry described as recording settlement of the factoring agreement. (jurisdiction: United States, entity_scope: Illustrative example only (Larkin Co., transfer without recourse, actual bad debts of $16,000), accounting_basis: Accrual-basis financial accounting as taught in this US GAAP-oriented introductory course text, conditions: Stated only as an illustrative worked example (Larkin Co., $250,000 of receivables, 8% fee, $15,000 allowance retained); the text says the scenario 'is only for the purpose of comparing the two types')

“ Journal Page 1 Date Description Post. Ref. Debit Credit 20X2 Sept 30 Allowance for Doubtful Accounts 15,000.00 Sept 30       Due from Factor 15,000.00 Sept 30 To record settlement of factoring agreement. ”

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.

What happens to the customer's invoice in your ledger

See Upon completion of a transfer of an entire financial asset or a group of entire financial assets that satisfies the conditions in paragraph 860-10-40-5 to be accounted for as a sale, the transferor (seller) must derecognise the transferred financial assets, apply paragraphs 860-20-25-1 and 860-20-30-1 on recognition and measurement of assets obtained and liabilities incurred in the sale, and recognise in earnings any gain or loss on the sale.

See In the text's illustrative entry at the date of transfer, the $15,000 the factor keeps back is recorded by the transferring company in a 'Due from Factor' account for $15,000, while Accounts Receivable is removed for the full $250,000.00 transferred, the entry being described as 'Receivables sold to factor at a discount'.

Where a transfer is accounted for as a secured borrowing with pledge of collateral, the transferor must continue to report the transferred financial asset in its statement of financial position with no change in the asset's measurement (that is, basis of accounting). (jurisdiction: United States, entity_scope: Nongovernmental entities applying U.S. generally accepted accounting principles (the FASB Accounting Standards Codification), accounting_basis: U.S. GAAP (FASB Accounting Standards Codification, Topic 860 Transfers and Servicing), effective_from: First annual reporting period beginning after November 15, 2009 (ASC 860-10-65-3(a)))

“The transferor shall continue to report the transferred financial asset in its statement of financial position with no change in the asset’s measurement (that is, basis of accounting).”

Pledging involves using accounts receivable as collateral for a loan, with the business retaining ownership of the receivables and responsibility for collecting them. (jurisdiction: United States (US professional accounting reference; the article itself states no jurisdiction), entity_scope: A business that pledges its accounts receivable)

“Pledging involves using accounts receivable as collateral for a loan, with the business retaining ownership and responsibility for collection.”

Not established from an authoritative source.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.

Sale or loan? The determination that drives every entry

One condition for sale accounting is isolation: the transferred financial assets have been isolated from the transferor, put presumptively beyond the reach of the transferor and its creditors even in bankruptcy or other receivership, and they are isolated in bankruptcy or other receivership only if they would be beyond the reach of the powers of a bankruptcy trustee or other receiver for the transferor or any of its consolidated affiliates included in the financial statements being presented. (jurisdiction: United States, entity_scope: Nongovernmental entities applying U.S. generally accepted accounting principles (the FASB Accounting Standards Codification), accounting_basis: U.S. GAAP (FASB Accounting Standards Codification, Topic 860 Transfers and Servicing), effective_from: First annual reporting period beginning after November 15, 2009 (ASC 860-10-65-3(a)))

“Isolation of transferred financial assets. The transferred financial assets have been isolated from the transferor—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivershipreceivership. Transferred financial assets are isolated in bankruptcy or other receivership only if the transferred financial assets would be beyond the reach of the powers of a bankruptcy trustee or other receiver for the transferor or any of its consolidated affiliates included in the financial statements being presented.”

A third condition for sale accounting is that the transferor, its consolidated affiliates included in the financial statements being presented, and its agents do not maintain effective control over the transferred financial assets or related third-party beneficial interests; the paragraph states that a transferor's effective control includes, but is not limited to, the forms listed. (jurisdiction: United States, entity_scope: Nongovernmental entities applying U.S. generally accepted accounting principles (the FASB Accounting Standards Codification), accounting_basis: U.S. GAAP (FASB Accounting Standards Codification, Topic 860 Transfers and Servicing), effective_from: First annual reporting period beginning after November 15, 2009 (ASC 860-10-65-3(a)))

“Effective control. The transferortransferor, its consolidated affiliates included in the financial statements being presented, or its agents doesdo not maintain effective control over the transferred financial assets or third-party beneficial interests related to those transferred assets (see paragraph 860-10-40-22A). A transferor’s effective control over the transferred financial assets includes, but is not limited to, through eitherany of the following: [FAS 140, paragraph 9, sequence 92.1]”

A transfer that satisfies the conditions in paragraph 860-10-40-5 is accounted for under Subtopic 860-20, including its derecognition guidance and its guidance on recognition of new assets obtained and new liabilities, while a transfer that does not satisfy those conditions is accounted for under Subtopic 860-30 (secured borrowings and collateral). (jurisdiction: United States, entity_scope: Nongovernmental entities applying U.S. generally accepted accounting principles (the FASB Accounting Standards Codification), accounting_basis: U.S. GAAP (FASB Accounting Standards Codification, Topic 860 Transfers and Servicing), effective_from: First annual reporting period beginning after November 15, 2009 (ASC 860-10-65-3(a)))

“For guidance on accounting for a transfer that satisfies the conditions in the preceding paragraph, see Subtopic 860-20, including Section 860-20-40’s derecognition guidance and Section 860-20-25’s guidance on recognition of new assets obtained and new liabilities. For guidance on accounting for a transfer that does not satisfy the conditions in the preceding paragraph, see Subtopic 860-30.”

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.

Why the revenue on the invoice does not change

An entity must recognise revenue when (or as) it satisfies a performance obligation by transferring a promised good or service (that is, an asset) to a customer, and an asset is transferred when (or as) the customer obtains control of that asset. (jurisdiction: United States — U.S. GAAP (FASB Accounting Standards Codification), nongovernmental entities, entity_scope: Entities applying U.S. GAAP to contracts with customers within the scope of Topic 606 (606-10-15-1: the guidance in Subtopic 606-10 applies to all entities; exceptions listed in 606-10-15-2), accounting_basis: U.S. GAAP accrual accounting (FASB Accounting Standards Codification), effective_from: Annual reporting periods beginning after December 15, 2016 for a public business entity, a not-for-profit entity with publicly traded/listed/quoted securities or that is a conduit bond obligor, and an employee benefit plan filing with the SEC; annual reporting periods beginning after December 15, 2017 (interim periods within annual periods beginning after December 15, 2018) for all other entities (606-10-65-1))

“606-10-25-23 An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (that is, an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.”

An entity must present the effects of financing (interest income or interest expense) separately from revenue from contracts with customers in the statement of comprehensive income, and interest income or interest expense is recognised only to the extent that a contract asset (or receivable) or a contract liability is recognised in accounting for a contract with a customer. (jurisdiction: United States — U.S. GAAP (FASB Accounting Standards Codification), nongovernmental entities, entity_scope: Entities applying U.S. GAAP to contracts with customers within the scope of Topic 606 (606-10-15-1: the guidance in Subtopic 606-10 applies to all entities; exceptions listed in 606-10-15-2), accounting_basis: U.S. GAAP accrual accounting (FASB Accounting Standards Codification), effective_from: Annual reporting periods beginning after December 15, 2016 for a public business entity, a not-for-profit entity with publicly traded/listed/quoted securities or that is a conduit bond obligor, and an employee benefit plan filing with the SEC; annual reporting periods beginning after December 15, 2017 (interim periods within annual periods beginning after December 15, 2018) for all other entities (606-10-65-1))

“606-10-32-20 An entity shall present the effects of financing (interest income or interest expense) separately from revenue from contracts with customers in the statement of comprehensive income (statement of activities). Interest income or interest expense is recognized only to the extent that a contract asset (or receivable) or a contract liability is recognized in accounting for a contract with a customer.”

One of the exceptions listed in paragraph 606-10-15-2 is financial instruments and other contractual rights or obligations within the scope of the Topics it lists, which include Topic 310 on Receivables and Topic 860 on Transfers and Servicing. (jurisdiction: United States — U.S. GAAP (FASB Accounting Standards Codification), nongovernmental entities, entity_scope: Contracts with customers otherwise within the scope of Topic 606, accounting_basis: U.S. GAAP accrual accounting (FASB Accounting Standards Codification), effective_from: Annual reporting periods beginning after December 15, 2016 for a public business entity, a not-for-profit entity with publicly traded/listed/quoted securities or that is a conduit bond obligor, and an employee benefit plan filing with the SEC; annual reporting periods beginning after December 15, 2017 (interim periods within annual periods beginning after December 15, 2018) for all other entities (606-10-65-1))

“Financial instruments and other contractual rights or obligations within the scope of the following Topics: 1. Topic 310, Receivables 2. Topic 320, Investments—Debt and Equity Securities 3. Topic 323, Investments—Equity Method and Joint Ventures 4. Topic 325, Investments—Other 5. Topic 405, Liabilities 6. Topic 470, Debt 7. Topic 815, Derivatives and Hedging 8. Topic 825, Financial Instruments 9. Topic 860, Transfers and Servicing.”

Partly established. Established: the criterion by which that is assessed (S19). Missing: that the revenue recognised on the underlying invoices is determined independently of the financing.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.

If the customer doesn't pay and the invoice is charged back

In a transfer of an entire receivable, a group of entire receivables, or a portion of an entire receivable with recourse, the transferor provides the transferee with full or limited recourse and is obligated under the recourse provision to make payments to the transferee or to repurchase receivables sold under certain circumstances, typically for defaults up to a specified percentage. (jurisdiction: United States, entity_scope: Nongovernmental entities applying U.S. generally accepted accounting principles (the FASB Accounting Standards Codification), accounting_basis: U.S. GAAP (FASB Accounting Standards Codification, Topic 860 Transfers and Servicing), effective_from: First annual reporting period beginning after November 15, 2009 (ASC 860-10-65-3(a)), conditions: Background description of recourse arrangements; the specific circumstances are set by the recourse provision)

“In a transfer of receivablesan entire receivable, a group of entire receivables, or a portion of an entire receivable with recourse, the transferor provides the transferee with full or limited recourse. The transferor is obligated under the terms of the recourse provision to make payments to the transferee or to repurchase receivables sold under certain circumstances, typically for defaults up to a specified percentage.”

In the text's example, had the transfer been with recourse, then because the actual bad debts exceed the amount initially retained by the factor the transferring company would have to pay the factor a further $1,000. (jurisdiction: United States, entity_scope: Illustrative example only (Larkin Co., transfer with recourse), conditions: Stated only as an illustrative worked example (Larkin Co., $250,000 of receivables, 8% fee, $15,000 allowance retained); the text says the scenario 'is only for the purpose of comparing the two types'; Applies where actual bad debts ($16,000) exceed the amount initially retained by the factor ($15,000))

“If this had been with recourse, and since the actual bad debts exceed the amount initially retained by the factor, Larkin, Co. would have to pay the factor an additional $1,000 and the journal entry would look like this:”

In the text's illustrative with-recourse settlement entry, Allowance for Doubtful Accounts of $16,000.00 is set against the $15,000.00 Due from Factor balance together with $1,000.00 of Checking, in an entry described as recording settlement of the factoring agreement. (jurisdiction: United States, entity_scope: Illustrative example only (Larkin Co., transfer with recourse, actual bad debts of $16,000), accounting_basis: Accrual-basis financial accounting as taught in this US GAAP-oriented introductory course text, conditions: Stated only as an illustrative worked example (Larkin Co., $250,000 of receivables, 8% fee, $15,000 allowance retained); the text says the scenario 'is only for the purpose of comparing the two types')

“ Journal Page 1 Date Description Post. Ref. Debit Credit 20X2 Sept 30 Allowance for Doubtful Accounts 16,000.00 Sept 30 Checking 1,000.00 Sept 30       Due from Factor 15,000.00 Sept 30 To record settlement of factoring agreement. ”

Partly established. Established: the treatment when the customer fails to pay and the invoice is charged back to the business under a recourse arrangement (S24, S25). Missing: what is restored to the ledger.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.

How the arrangement works, event by event

Factoring is the direct purchase, usually without recourse, of third-party ('customer') accounts receivable: the factor buys the receivables at a discount, pays the client what the third party owes, and assumes all the credit risk for the purchased accounts. (jurisdiction: United States, entity_scope: factors and their clients (the sellers of the receivables), as described by the OCC, effective_from: 2000-03, conditions: hedged: purchase is 'usually' without recourse)

“Factoring involves the direct purchase, usually without recourse, of third-party (traditionally termed the “customer”) accounts receivable. The factor purchases the receivables at a discount, pays the company (traditionally termed the “client”) what the third party owes, and assumes all the credit risk for the purchased accounts.”

Banks usually advance amounts equal to between 70 percent and 80 percent of eligible receivables, and lower advance rates may be warranted when there is heightened risk. (jurisdiction: United States, entity_scope: ARIF (accounts receivable and inventory financing) lenders and their borrowers, as described in OCC examination guidance for national banks, effective_from: 2000-03, conditions: hedged: 'usually'; lower rates 'may' be warranted)

“While banks usually advance amounts equal to between 70 percent and 80 percent of eligible receivables, lower advance rates may be warranted when there is heightened risk.”

Factors frequently perform all accounting functions connected with the accounts receivable, and purchasers are notified to remit payments directly to the factor. (jurisdiction: United States, entity_scope: factors and their clients (the sellers of the receivables), as described by the OCC, effective_from: 2000-03, conditions: hedged: 'frequently')

“Factors frequently perform all accounting functions in connection with the accounts receivable and purchasers are notified to remit payments directly to the factor.”

Under a non-notification arrangement the bank may also allow the borrower to collect payments and remit them to the bank for credit against the loan balance. (jurisdiction: United States, entity_scope: ARIF (accounts receivable and inventory financing) lenders and their borrowers, as described in OCC examination guidance for national banks, effective_from: 2000-03, conditions: non-notification arrangements)

“The bank may also allow the borrower to collect payments and remit them to the bank for credit against the loan balance.”

Partly established. Established: the advance in ledger terms (S06); the finance charge in ledger terms (S06); the retained holdback in ledger terms (S09); the possible chargeback in ledger terms (S25). Missing: the customer settlement in ledger terms.

Required authority: authoritative lender insurer or program documentation. Highest achieved: high quality professional secondary reference, primary regulator or government.

Tying your ledger to the finance company's statement

In asset-based lending the summary chart records that payments are made directly to a bank-controlled lock box and applied to the loan balance. (jurisdiction: United States, entity_scope: ARIF (accounts receivable and inventory financing) lenders and their borrowers, as described in OCC examination guidance for national banks, effective_from: 2000-03, conditions: asset-based lending column of the summary chart)

“Payments are made directly to a bankcontrolled lock box and applied to the loan balance.”

In ABL and some secured financing, lenders require an aging of receivables listing receivables by customer name, balance outstanding and current payment status, and each day (or less frequently if the agreement so stipulates) the lender adjusts the maximum credit available based on eligible receivables and cash receipts. (jurisdiction: United States, entity_scope: ARIF (accounts receivable and inventory financing) lenders and their borrowers, as described in OCC examination guidance for national banks, effective_from: 2000-03, conditions: ABL and some secured financing arrangements)

“In ABL and some secured financing, lenders will require an aging of receivables which lists receivables by customer name, balance outstanding, and current payment status. Each day (or less frequently if the agreement so stipulates), the lender adjusts the maximum amount of credit available based on the amount of eligible receivables and cash receipts.”

In ABL it is a practice to charge interest and fees to the revolver instead of collecting those payments in cash, which lets the lender collect additional interest on those balances. (jurisdiction: United States, entity_scope: ARIF (accounts receivable and inventory financing) lenders and their borrowers, as described in OCC examination guidance for national banks, effective_from: 2000-03, conditions: described as an ABL practice)

“Another source of added income in ARIF is the ABL practice of charging interest and fees to the revolver instead of collecting those payments in cash. The advantage to the lender is the ability to collect additional interest on those balances.”

Dilution is the possibility that non-cash credits — returns and allowances, disputes, bad debts and other credit offsets — will reduce the accounts receivable balance; percentages vary by industry but dilution is usually 5 percent or less of receivables. (jurisdiction: United States, entity_scope: ARIF (accounts receivable and inventory financing) lenders and their borrowers, as described in OCC examination guidance for national banks, effective_from: 2000-03, conditions: hedged: 'usually'; percentages vary by industry)

“ARIF borrowers and their lenders are exposed to dilution risk — the possibility that non-cash credits will reduce, or dilute, the accounts receivable balance. Returns and allowances, disputes, bad debts, and other credit offsets create dilution. While percentages vary by industry, dilution is usually 5 percent or less of receivables.”

Not established from an authoritative source.

Required authority: authoritative lender insurer or program documentation. Highest achieved: primary regulator or government.

Documents to obtain and keep

A loan agreement is a written, signed contract between borrower and lender that defines the terms and conditions governing the loan. (jurisdiction: United States, entity_scope: ARIF (accounts receivable and inventory financing) lenders and their borrowers, as described in OCC examination guidance for national banks, effective_from: 2000-03)

“Loan agreements are written, signed contracts between a borrower and a lender that clearly define the terms and conditions that govern the loan.”

The loan agreement also establishes how frequently the borrowing base is recalculated, identifies the documentation necessary to support loan advances, and describes how cash proceeds are handled. (jurisdiction: United States, entity_scope: ARIF (accounts receivable and inventory financing) lenders and their borrowers, as described in OCC examination guidance for national banks, effective_from: 2000-03)

“The loan agreement also establishes how frequently the borrowing base is recalculated, identifies what documentation is necessary to support loan advances, and describes how cash proceeds are handled.”

ARIF borrowers are required to certify compliance with the borrowing base and to supply receivables agings quarterly, monthly or even weekly; borrowing base certificates and agings give detailed collateral information but are not a substitute for periodic financial statements. (jurisdiction: United States, entity_scope: ARIF (accounts receivable and inventory financing) lenders and their borrowers, as described in OCC examination guidance for national banks, effective_from: 2000-03)

“ARIF borrowers are also required to certify compliance with the borrowing base and supply receivables agings quarterly, monthly, or even weekly. While borrowing base certificates and agings provide detailed information about the collateral, they are not a substitute for periodic financial statements.”

The booklet defines a credit memo as a detailed memorandum from one party to another granting credit for returned merchandise, an omission, overpayment or other cause, and it may also mean the posting medium authorizing the credit to a specific account, including transaction details and the authorizing party's signature or initials. (jurisdiction: United States, entity_scope: ARIF (accounts receivable and inventory financing) lenders and their borrowers, as described in OCC examination guidance for national banks, effective_from: 2000-03, conditions: glossary definition)

“Credit Memo - A detailed memorandum forwarded from one party or firm to another granting credit for returned merchandise, some omission, overpayment, or other cause. It may also refer to the posting medium authorizing the credit to a specific account, including details of the transaction and signature or initials of the party authorizing the credit.”

Not established from an authoritative source.

Required authority: authoritative lender insurer or program documentation. Highest achieved: high quality professional secondary reference, primary regulator or government.

The criteria that decide transfer versus borrowing

A transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in which the transferor surrenders control over those financial assets must be accounted for as a sale, and the transferor has surrendered control if and only if all of the stated conditions are met. (jurisdiction: United States, entity_scope: Nongovernmental entities applying U.S. generally accepted accounting principles (the FASB Accounting Standards Codification), accounting_basis: U.S. GAAP (FASB Accounting Standards Codification, Topic 860 Transfers and Servicing), effective_from: First annual reporting period beginning after November 15, 2009 (ASC 860-10-65-3(a)))

“A transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in which the transferor surrenders control over those financial assets shall be accounted for as a sale [FAS 140, paragraph 9, sequence 89.1]The transferor has surrendered control over transferred assets if and only if all of the following conditions are met:”

In the context of U.S. bankruptcy laws a true sale opinion from an attorney is often required to support a conclusion that transferred financial assets are isolated from the transferor, any of its consolidated affiliates included in the financial statements being presented, and its creditors, and a nonconsolidation opinion is often required if the transfer is to an affiliated entity. (jurisdiction: United States, entity_scope: Nongovernmental entities applying U.S. generally accepted accounting principles (the FASB Accounting Standards Codification), accounting_basis: U.S. GAAP (FASB Accounting Standards Codification, Topic 860 Transfers and Servicing), effective_from: First annual reporting period beginning after November 15, 2009 (ASC 860-10-65-3(a)), conditions: Stated for the context of U.S. bankruptcy laws; “often required”, not required in every case)

“In the context of U.S. bankruptcy laws, a true sale opinion from an attorney is often required to support a conclusion that transferred financial assets are isolated from the transferor, any of its consolidated affiliates included in the financial statements being presented, and its creditors. In addition, a nonconsolidation opinion is often required if the transfer is to an affiliated entity.”

Factoring arrangements that meet the conditions in paragraph 860-10-40-5 must be accounted for as sales of financial assets, because the transferor surrenders control over the receivables to the factor. (jurisdiction: United States, entity_scope: Nongovernmental entities applying U.S. generally accepted accounting principles (the FASB Accounting Standards Codification), accounting_basis: U.S. GAAP (FASB Accounting Standards Codification, Topic 860 Transfers and Servicing), effective_from: First annual reporting period beginning after November 15, 2009 (ASC 860-10-65-3(a)))

“Paragraph 860-10-05-14 provides background on factoring arrangements. Factoring arrangements that meet the criteriaconditions in paragraph 860-10-40-5 shall be accounted for as sales of financial assets because the transferor surrenders control over the receivables to the factor.”

A transfer of receivables in their entireties with recourse must be accounted for as a sale, with the proceeds of the sale reduced by the fair value of the recourse obligation, if the conditions in paragraph 860-10-40-5 are met; otherwise the transfer of receivables with recourse must be accounted for as a secured borrowing. (jurisdiction: United States, entity_scope: Nongovernmental entities applying U.S. generally accepted accounting principles (the FASB Accounting Standards Codification), accounting_basis: U.S. GAAP (FASB Accounting Standards Codification, Topic 860 Transfers and Servicing), effective_from: First annual reporting period beginning after November 15, 2009 (ASC 860-10-65-3(a)), conditions: Transfer consists of an entire financial asset or a group of entire financial assets)

“A transfer of receivables in their entireties with recourse shall be accounted for as a sale, with the proceeds of the sale reduced by the fair value of the recourse obligation, if the criteriaconditions in paragraph 860-10-40-5 are met. Otherwise, a transfer of receivables with recourse shall be accounted for as a secured borrowing.”

Partly established. Established: the criteria that decide whether a receivables financing arrangement is accounted for as a transfer of the receivable or as a borrowing secured by receivables (S01, S17, S38, S40, S41); what evidence supports the determination (S39). Missing: how the cash advanced is classified under each determination; whether the customer receivable is derecognised, reclassified as an amount due from the finance company, or retained with an offsetting obligation under each determination.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.

How the fee or discount is classified, and when

See The proceeds from a sale of financial assets consist of the cash and any other assets obtained, including beneficial interests and separately recognized servicing assets, less any liabilities incurred, including separately recognized servicing liabilities; any asset obtained that is not an interest in the transferred asset is part of the proceeds, and any liability incurred, even if related to the transferred financial assets, is a reduction of the proceeds.

See In the text's illustrative entry, the whole $20,000.00 fee is recorded as Interest Expense on the transfer date (Oct. 1, 20X1) rather than being spread over the period to collection, with Checking recorded at $205,000.00 on that same date.

See The article states that the "loss on sale of receivables" is not really a loss, but a combination of interest expense related to the early receipt of cash and the shifting of the risk of bad debt loss to the factor.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.

What the reserve is and what releases it

See In the text's worked example, a company transferring $250 thousand of receivables without recourse pays an 8% fee and, in addition to that fee, the factor keeps an allowance of $15,000 to cover bad accounts.

See In the text's illustrative entry at the date of transfer, the $15,000 the factor keeps back is recorded by the transferring company in a 'Due from Factor' account for $15,000, while Accounts Receivable is removed for the full $250,000.00 transferred, the entry being described as 'Receivables sold to factor at a discount'.

See There will be some kind of deadline on a factoring agreement.

See In the text's illustrative without-recourse case, at the agreement's end date the $15,000.00 Due from Factor balance is cleared against Allowance for Doubtful Accounts of $15,000.00, in an entry described as recording settlement of the factoring agreement.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.

Chargebacks: what comes back onto the books

See In a transfer of an entire receivable, a group of entire receivables, or a portion of an entire receivable with recourse, the transferor provides the transferee with full or limited recourse and is obligated under the recourse provision to make payments to the transferee or to repurchase receivables sold under certain circumstances, typically for defaults up to a specified percentage.

See In the text's example, had the transfer been with recourse, then because the actual bad debts exceed the amount initially retained by the factor the transferring company would have to pay the factor a further $1,000.

See In the text's illustrative with-recourse settlement entry, Allowance for Doubtful Accounts of $16,000.00 is set against the $15,000.00 Due from Factor balance together with $1,000.00 of Checking, in an entry described as recording settlement of the factoring agreement.

Partly established. Established: the treatment when a financed invoice is charged back to the business because the customer did not pay (S24, S25); how the reserve is affected (S25). Missing: what is restored to the receivables ledger.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.

What the finance company's paperwork covers

See Factoring is the direct purchase, usually without recourse, of third-party ('customer') accounts receivable: the factor buys the receivables at a discount, pays the client what the third party owes, and assumes all the credit risk for the purchased accounts.

The booklet defines an advance as a drawdown or disbursement of funds according to the terms of an existing loan agreement; advances are common to revolving credit facilities, and the term can also refer to a customer paying its accounts payable before the agreed-upon date. (jurisdiction: United States, entity_scope: ARIF (accounts receivable and inventory financing) lenders and their borrowers, as described in OCC examination guidance for national banks, effective_from: 2000-03, conditions: glossary definition, not a requirement)

“Advance - A drawdown or disbursement of funds according to the terms of an existing loan agreement. Advances are common to revolving credit facilities. The term can also refer to a customer paying its accounts payable prior to the agreed-upon date.”

Loan agreements establish the conditions that trigger higher interest rates and fee-based servicing requirements, and the fee structure typically includes customer charges for many administrative costs, including field audit, lock box and appraisals. (jurisdiction: United States, entity_scope: ARIF (accounts receivable and inventory financing) lenders and their borrowers, as described in OCC examination guidance for national banks, effective_from: 2000-03, conditions: the list of charges is open ('including'))

“Loan agreements clearly establish conditions that trigger higher interest rates and fee-based servicing requirements. The fee structure typically includes customer charges for many of the administrative costs including field audit, lock box, and appraisals.”

On fully followed lines, funds are advanced against specific supporting collateral documents such as invoices, shipping documents or receipts, which are verified and reconciled during field audits. (jurisdiction: United States, entity_scope: ARIF (accounts receivable and inventory financing) lenders and their borrowers, as described in OCC examination guidance for national banks, effective_from: 2000-03, conditions: fully followed ABL lines; document list is open ('such as'))

“ABL units commonly exert strict control over the use of loan proceeds. Fully followed lines are the most tightly controlled. For such lines, funds are advanced against specific supporting collateral documents (such as invoices, shipping documents, or receipts) that are verified and reconciled during field audits.”

Not established from an authoritative source.

Required authority: authoritative lender insurer or program documentation. Highest achieved: high quality professional secondary reference, primary regulator or government.

Revenue on the underlying invoice

See An entity must recognise revenue when (or as) it satisfies a performance obligation by transferring a promised good or service (that is, an asset) to a customer, and an asset is transferred when (or as) the customer obtains control of that asset.

See An entity must present the effects of financing (interest income or interest expense) separately from revenue from contracts with customers in the statement of comprehensive income, and interest income or interest expense is recognised only to the extent that a contract asset (or receivable) or a contract liability is recognised in accounting for a contract with a customer.

See One of the exceptions listed in paragraph 606-10-15-2 is financial instruments and other contractual rights or obligations within the scope of the Topics it lists, which include Topic 310 on Receivables and Topic 860 on Transfers and Servicing.

Partly established. Established: the criterion by which that is determined (S19). Missing: how financing a receivable affects, or does not affect, the revenue already recognised on the underlying invoice.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.