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"<!-- wp:paragraph -->\n<p>With both recourse and non-recourse factoring an unpaid invoice, if it qualifies for factoring, is bought from a company and transferred into the account of the factoring firm. This involves a system of accounting which might be new to an accountant. This article will explore the rubric for accounting under the factoring system.</p>\n<!-- /wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>The first essential thing to note is that traditionally when an unpaid invoice or trade receivable is cleared for factoring it was moved off the balance sheet of the company who originally raised the invoice and moved onto the balance sheet of the factoring facility. What would remain on the company’s balance sheet would be a debt owed by the factoring firm for the unpaid balance. The unpaid balance is the difference between the prepayment sum and the actual sum noted on the invoice minus factoring fees.</p>\n<!-- /wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>Due to this outstanding sum remaining until the debtor pays the invoice, accountants have recognised that their client retains a significant interest in the invoice undergoing factoring. Not least because until an invoice reaches maturity and is paid off by the debtor there is a discount charge accruing which needs to be paid by the company to its factoring provider. Moreover, there could be an issue with the invoice – the debtor could query a delivery or claim a breach of warranty. In the case of recourse factoring, if there is a non-payment of a due invoice then the factoring company will utilise its ability to reject an invoice and demand a refund of its prepayment. And at the termination of a factoring facility a company will be contractually obliged to repurchase all its invoices. Thus, modern accounting for factoring requires complex systems to take all this into consideration.</p>\n<!-- /wp:paragraph -->\n\n<!-- wp:heading {\"level\":3} -->\n<h3>Financial Reporting Systems</h3>\n<!-- /wp:heading -->\n\n<!-- wp:paragraph -->\n<p>The <strong>Financial Reporting Council</strong> sets out in <strong>Financial Reporting Standard 5</strong> (FRS 5) the current principles on which standards are based. &nbsp;The council has also set out a framework of codes and standards for accounting, actuarial and auditing processes to be used in factoring arrangements. These standards are designed to reflect the commercial effect of an unpaid invoice, not just its legal status – the company might not own the unpaid invoice, but it continues to be of commercial interest to a company until the debt is paid in full.</p>\n<!-- /wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>Thus, the first principle of accounting in factoring is that a company must retain an invoice on its balance sheet while there remains a pecuniary interest in the invoice such as an unpaid balance or the possibility the factoring firm will use recourse to remove itself from responsibility for the collection of the debt. In this situation of a continued interest in an unpaid invoice the company must keep the full value of the invoice on its balance sheet. Prepayment for the invoice should be shown as a liability or as a deduction from the value of the asset.</p>\n<!-- /wp:paragraph -->\n\n<!-- wp:heading -->\n<h2>In Summary</h2>\n<!-- /wp:heading -->\n\n<!-- wp:paragraph -->\n<p>It has been traditionally thought that since a factoring firm buys unpaid invoices from its client that the sum of the debt would transfer from the balance sheet of a company to the balance sheet of the factoring company. However, due to the contractual arrangements in factoring (even non-recourse factoring) such a transfer does not reflect commercial reality in the sense that a company still retains an interest in the unpaid invoice. For this reason, a more complex form of accounting is necessary for factoring.</p>\n<!-- /wp:paragraph -->"
<https://www.invoicefinance.news/accounting-for-factoring/>