Accounting of Factoring SFAS No.

43

CONTENTS

Paragraph

INTRODUCTION 01 - 03

Objective 01
Scope 02
Definitions 03

ELUCIDATION 04 - 27

Types of Factoring 04 - 07
Accounting of factoring for the Factor 08 - 16
Factoring without Recourse 08 - 11
Factoring with Recourse 12 - 16
Accounting of factoring for the Client 17 - 25
Factoring without Recourse 17 - 21
Factoring with Recourse 22 -25
Disclosures 26 - 27
Disclosures by the Factor 26
Disclosures by the Client 27

STATEMENT OF FINANCIAL ACCOUINTING STANDARD

No. 43 ACCOUNTING OF FACTORING 28 - 42

Disclosures 40 - 41
Effective Date 42

PREFACE

Objective

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01. The purpose of this statement is to deal with the accounting treatment and
disclosures of factoring transactions for both the factor and the client.

Scope

02. This statement only deals with the accounting treatment and disclosures for
factoring transactions. This statement does not deal with the accounting treatment
of receivables used as loan collateral and other transfer of asset transactions, such
as asset back securitization and asset repurchase transaction.

Definitions

Following are definitions of terms used in this statement :

Factoring is a type of financing in the form of a purchase or transfer of receivables or

short term receivables of a company resulting from business transactions.

Client is the company selling or transferring the receivables.

Factor is a financing institution or other institution purchasing or receiving the transfer of

receivables.

Customers are companies having an obligation or liability to the client.

Retention is that part of the factoring funds withheld by the factor as a protection against
possible adjustment to the amount of receivables before maturity (for example, discount
and sales return).

Recourse is the right of the factor to receive payments from the client if the receivables
transferred cannot be paid by the customers at the time they are due.

ELUCIDATION

Types of factoring

04. Factoring activities can be classified into two types, namely non-financing services
and financing services. Non-financing services includes the administration of credit
sales and the collection of the clients’ receivables such as : credit investigation,
sales ledger administration, credit control and collection and protection against
credit risk. The factor receives a fee from the clients for the rendering of these
services (service fee and or handling fee). Financing services cover purchasing
services and or the transfer of short term receivables from business activities
including domestic and foreign trade transactions. The financing factoring can be
Accounting of Factoring SFAS No. 43

divided into two groups : namely factoring without recourse and factoring with
recourse. The factor receives interest or discount from financing factoring.

05. Factoring without recourse constitutes sales of receivables based on

notification. The client sells his receivables to the factor and the factor fully
bears the collection risk without the right to receive payments from the client
in the event a loss occurs due to the non-collectibility of the receivables
transferred. The customers make payments of the receivables transferred
directly to the factor.

06. In the case of factoring with recourse, the client is obligated to pay fully (full
recourse) or partly (limited recourse) the funds received from the receivables
transferred, or to repurchase the receivables, in case the customers do not pay the
receivables transferred on due dates.

07. Factoring with recourse shall be treated as a sale of receivables if all of the
following criteria are satisfied :

a. The client has no more future economic benefit and does not bear the risk of
the collectibility of the receivables.
b. the client’s obligation in the recourse agreement can be reliably estimated
c. the client has no obligation or option to repurchase the receivables.

Accounting of factoring for the Factor

08. Factoring without recourse shall be recognized as a factoring receivables in

the amount of receivables acquired. Any difference between the factoring
receivables and the amount of payments made to the client plus retention
shall be recognized as income from factoring at the time of the factoring
transaction.

09. Factoring receivables without recourse shall be presented at the net realizable
value, whilst retention shall be recognized as a factoring retention payable
and presented on the balance sheet as a liability.

10. In a factoring without recourse transaction the factor shall treat the receivables
acquired from the client as a purchase of receivables. The factor acquires a right
and at the same time bears the risk of the collectibility of the receivables. With this
purchase, the factor recognizes the receivables transferred as an asset called
account receivable factoring. On the other hand, the factor bears the risk of the
collectibility of the receivables by establishing a reserve for doubtful accounts.

11. In a factoring without recourse, the factor already obtains a right on the
receivables. Therefore, the part of funds withheld in respect of the factoring
represents a liability called account payable factoring retention. The account
payable factoring retention will decrease if there is an adjustment to the receivable,
for example if the client gives a sale discount and receive a return sales and the

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 balance will be returned to the client at the time of the final settlement of the
factoring.

Factoring with Recourse

12. Factoring with recourse shall be recognized as a factoring receivable in the

amount of receivables acquired. Any difference between the factoring
receivables and the amount of payments made to the client plus retention
shall be recognized as deferred income during the factoring period.

13. Factoring with recourse basically constitutes a loan with receivables as collateral.
Therefore, any difference between the factoring receivable and the amounts paid to
the client plus retention, constitute deferred factoring income which shall be
recognized as income during the factoring period.

14. Factoring with recourse receivables shall be presented at the net realizable
value with the retention shown as a deduction of the factoring receivables.

15. Although the collectibility risk under factoring with recourse remains with the
client, the factor still bears the risk of collectibility on the financing provided.
Therefore, factoring with recourse receivables must be presented at the net
realizable value.

16. In a factoring with a recourse, retention represents part of the loan withheld as a
protection against the probability of an adjustment to the receivables. Accordingly,
the presentation of retention as a deduction of the factoring receivables more
reflects the real amount of the loan.

Accounting of factoring for the client

Factoring without Recourse

17. Factoring without recourse shall be treated as a sale of the receivables. Any
difference between the amount of receivables transferred and funds received
plus retention shall be recognized as a loss from the factoring transaction.

18. Factoring without recourse is in substance a sale of receivables. The client has no
more economic benefit and no longer bears the risk on the collectibility of the
receivables transferred. The substance of the sales of the receivables is the
reduction of the amounts of the recorded receivables and the occurance of a loss
or gain. In a factoring without recourse the client has transferred the collectibility
risk of the receivables so that a provision for doubtful accounts is not needed.

19. Any loss from factoring without recourse transaction shall be recognized as
an expense at the time of transaction and shall be presented in the profit and
loss statement as an operating expenses.
Accounting of Factoring SFAS No. 43

20. Funds withheld (retention) by the factor in respect of factoring without

recourse shall be recognized as a factoring retention receivable and presented
on the balance sheet as current asset.

21. In general the factor withholds part of the funds from factoring as a protection
against the probability of adjustment to the receivables transferred, such as
discount and return sales. This retention shall be returned by the factor to the
client on maturity date and for this reason shall be recorded as a factoring retention
receivable at the time of transaction.

Factoring with Recourse

22. Factoring with recourse shall be recognized as a factoring liability in the

amount of the receivables transferred. Any difference between the amount of
receivables transferred and funds received plus retention shall be recognized
as interest expense during the factoring period.

23. In a factoring with recourse, the client is obligated to make payments to the factor,
if the receivables transferred were not paid by the customers on due date. This
type of factoring is in substance as loan with the receivables as collateral.
Accordingly, the client shall recognize the factoring as a liability and shall continue
to recognize these receivables in the financial statements. Since the collectibility
risk remains with the client, the client must present the receivables at their net
realizable values by establishing a reserve for doubtful accounts.

24. The factoring obligation shall be presented on the balance sheet in the
amount of the receivables transferred less retention and unamortized interest
expenses.

25. Retention is not an obligation in a factoring with recourse. Therefore, the

presention of retention as a reduction of the liability more reflects the real factoring
liability.
26. Adequate disclosures must be made in the notes to the financial statements in
respects of the following :

a. the accounting policy used for factoring

b. the total amount of factoring without recourse receivables, including
factoring with recourse receivables that meet the sale criteria, the
total of factoring retention liability and factoring income and
disclosures regarding other important commitments contained in the
factoring agreement.
c. the total amount of factoring with recourse shall be disclosed as follows:

Rp.
Factoring Receivables (xxx)
Deferred factoring income (xxx)

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 Retention (xxx)
xxx
Provision for doubtful accounts (xxx)
Net factoring receivables xxx

d. Disclosures of important commitments dealt with in the agreement of

factoring with recourse cover a.o. : interest rate, maturity date and the
total of receivables acquired.

Disclosures by the Client

27. Adequate disclosures must be made in the notes to the financial statements in
respect of the following :

a. The accounting policy on factoring transactions, either without or with

recourse.
b. The total amount of factoring with recourse receivables, transferred,
including factoring with recourse receivables that meet the sale criteria.
The disclosures shall cover interest expenses, retention, maturity date,
the amount of receivables transferred and other important commitments
contained in the factoring agreement.

The total factoring with recourse liability shall be disclosed as follows :

Rp.

Factoring liability xxx

Retention (xxx)
Unamortized interest expense (xxx)
Net factoring liability xxx
STATEMENT OF THE FINANCIAL ACCOUNTING STANDARD No. 43
ACCOUNTING OF FACTORING

This Statement of Financial Accounting Standard No. 43 consists of Paragraphs 28

to 42. This statement must be read in the context of paragraphs 01 to 27.

Types of Factoring

28. Factoring without recourse constitutes a sale of receivables based on

notification. The client sells his receivables based on notification. The clients
sells his receivables to the factor and the factor fully bears the collectibility
risk, without the right to receive payments from the client in the event a loss
occurs due to the non-collectibility of the receivables transferred directly to
the factor.
Accounting of Factoring SFAS No. 43

29. In the case of factoring with recourse, the client is obligated to pay fully (full
recourse) or partly (limited recourse) the funds received from the receivables
transferred, or to repurchase the receivables transferred, in case the
customers do not pay the receivables transferred on due dates.

30. Factoring with recourse shall be treated as a sale of receivables, if all of the
following criteria are satisfied :

a. The client has not more future economic benefit and does not bear the
risk of the collectibility of the receivables
b. The client’s obligation in the recourse agreement can be reliably
estimated,
c. The client has no obligation or option to repurchase the receivables.

Accounting of Factoring for the Factor

Factoring without Recourse

31. Factoring without recourse shall be recognized as a factoring receivable in

the amount of receivables acquired. Any difference between the factoring
receivables and the amount of payments made to the client plus retention
shall be recognized as income from factoring at the time of the factoring
transaction.

32. Factoring receivables without recourse shall be presented at the net realizable
value, whilst retention shall be recognized as a factoring retention payable
and presented on the balance sheet as a liability.

Factoring with Recourse

33. Factoring with recourse shall be recognized as a factoring receivable in the

amount of the receivables acquired. Any difference between the factoring
receivables and the amount of payments made to the client plus retention
shall be recognized as deferred income during the factoring period.

34. Factoring with recourse shall be presented at the net realizable value with
the retention shown as a deduction of the factoring receivables.

Accounting of Factoring for the Client

Factoring without Recourse

35. Factoring without recourse shall be treated as a sale of the receivables, any
difference between the amount of receivables transferred and funds received
plus retention shall be recognized as a loss from the factoring transaction.

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36. Any loss from factoring without recourse shall be recognized as an expense at
the time of transaction and shall be presented in the profit and loss statement
as an operating expense.

37. Funds withheld (retention) by the factor in respect of factoring without

recourse shall be recognized as a factoring retention receivable and presented
on the balance sheet as current asset.

Factoring with Recourse

38. Factoring with recourse shall be recognized as a factoring liability in the

amount of receivables transferred. Any difference between the amount of
receivables transferred and funds received plus retention shall be recognized
as interest expense during the factoring period.

39. The factoring liability shall be presented on the balance sheet in the amount
of the receivables transferred less retention and unamortized interest
expense.

Disclosures

Disclosures by the factor

40. Adequate disclosure must be made in the notes to the financial statements in
respect of the following :

a. The accounting policy used for factoring

b. The total amount of factoring without recourse receivables, including
factoring with recourse receivables that meet the sale criteria, the
total of factoring retention liability and factoring income and
disclosures regarding other important committments contained in
the factoring agreement
c. The total amount of factoring with recourse receivables shall be disclosed
as follows :

Rp.

Factoring Receivables xxx

Deferred factoring income (xxx)
Retention (xxx)
xxx
Accounting of Factoring SFAS No. 43

Provision for doubtful accounts (xxx)

Net factoring receivables xxx

d. Disclosures of important committments contained in the factoring

agreement with recourse cover a.o. : interest rate, maturity date and the
total of receivables acquired.

Disclosures by the Client

41. Adequate disclosures must be made in the notes to the Financial Statements
in respect of the following :

a. The accounting policy on factoring transactions, either without or with

recourse
b. The total amount of factoring with recourse receivables transferred,
including factoring with recourse receivables that meet the sale
criteria. The disclosures shall also cover the amount of loss,
factoring retention receivables, maturity date and other important
committments contained in the factoring agreement.
c. The amount of factoring liability in respect of factoring with recourse.
The disclosures shall cover interest expenses, retention, maturity
date, the amount of receivables transferred and other important
committments contained in the factoring agreement.
d. The total factoring with recourse liability shall be disclosed as follows :

Rp.

Factoring liability xxx

Retention (xxx)
Unamortized Interest expense (xxx)
Net factoring liability xxx

Effective Date

42. This statement becomes effective for the prepration and presentation of
Financial Statements covering the period beginning with or after 1 January,
1998. Early implementation is encouraged.

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