How factoring should be accounted for depends on the type of service specified in the contract between the factor (the seller/service provider that sells the receivable) and the factor (the institution that buys the receivable).
Accounting for full factoring
In full factoring (non-recourse), the factor assumes the risk of insolvency of the debtor (recipient of goods/services). This means that if the debtor does not pay the invoice, the factor does not have to return to the factor the advance received from him.
Since the entire receivable ultimately passes to the factor, the factoring agreement can be treated as a contract for the sale of receivables. Then, on the date of the transfer of the receivable to the factor, the factor should derecognize the receivable from its books – the transaction appears only on the active side of the factor’s balance sheet.
The amount received from the factor is included in financial income. In the accounting books, it can be recorded like this:
– Wn account 24 “Other settlements”;
– Ma account 75-0 “Financial income”.
The factor should simultaneously derecognize the receivable from the settlement account of the recipient of goods/services, for example, with such an entry:
– Wn account 75-1 “Financial expenses”;
– Ma account 20 “Settlements with customers”.
Fees that the factor charges for services rendered are included in finance costs. In the accounting books, the factor can record this as follows:
- gross value:
– Wn account 30 “Settlement of purchases”;
– Ma account 24 “Other settlements”.
- VAT value:
– Wn account 22-2 “Input VAT and its settlement”;
– Ma account 30 “Settlement of purchases”.
- net worth:
– Wn account 75-1 “Financial expenses”;
– Ma account 30 “Settlement of purchases”.
The receipt of funds from the factor, which was reduced by the fee for services rendered, can be recognized with such an entry:
– Wn account 13-0 “Current account”;
– Ma account 24 “Other settlements”.
Accounting for full factoring in the balance sheet
If the factor does not transfer the appropriate amount to the factor by the balance sheet date, it should be shown in the balance sheet under the item:
– B.II.2(c) “Short-term receivables from other entities – other”.
Accounting for incomplete factoring
In non-recourse factoring (with recourse), it is the factor who bears the risk of the debtor’s insolvency – if the debtor does not pay the invoice, the factor must return the advance to the factor.
In this case, the factoring agreement can be treated as a loan or credit agreement – the factor does not derecognize the receivables from its books, and a liability of a credit nature appears on the passive side of the balance sheet.
The amount received from the factor less the fee for services rendered can be accounted for as follows:
– Wn account 13-0 “Current account”;
– Ma account 24 “Other settlements”.
When the debtor pays the invoice, the factor should derecognize the receivables, for example, by this method:
– Wn account 24 “Other settlements”;
– Ma account 20 “Settlements with customers”.
However, if the debtor fails to do so, the factor must return the advance to the factor and can write it down like this:
– Wn account 24 “Other settlements”;
– Ma account 13-0 “Current account”.
Accounting for incomplete factoring in the balance sheet
If the debtor does not pay the invoice by the balance sheet date, the factor should show the liability to the factor on the passive side of the balance sheet under:
– B.III.2(c) “Current liabilities to other entities – other financial liabilities”.
Accounting for full and partial factoring in foreign currency
According to the law, company accounts must be kept entirely in Polish currency. Foreign currency operations can be recorded at the exchange rate:
- actually applied on the date of the operation, resulting from its nature – in the case of sale or purchase of currencies and payment of receivables or payables;
- or the average exchange rate announced for a given currency by the National Bank of Poland on the day preceding the day of operation – in the case of payment of receivables or liabilities, if it is not reasonable to use the exchange rate on the day of operation, and in the case of other operations.
As for the valuation of an invoice in foreign currency, the average exchange rate of the National Bank of Poland (NBP) from the day before the invoice was issued should be used. In contrast, the receipt of funds from a factor in foreign currency can be recorded at the exchange rate actually applied on the date of the operation.
Importantly, foreign currency transactions give rise to exchange rate differences that need to be accounted for in the books. These discrepancies are due to the constantly changing exchange rates: the value of the invoice on the day it is issued will be different from the value of the actual payment the entrepreneur will receive.
The factor should account for exchange rate differences according to the method it has adopted in its business:
- The balance sheet method – both realized exchange rate differences (those that arise when receivables are paid) and unrealized exchange rate differences (those that arise on balance sheet valuation of unpaid liabilities) are included in the tax bill;
- Tax method – only realized exchange rate differences are included in the tax bill.
