The rise of reverse factoring
Catriona Lawrie and James Nayler discuss the financial reporting implications of entering into reverse factoring arrangements.
Neither IFRS nor UK GAAP provides specific guidance on how a purchaser should account for reverse factoring arrangements. However, they both require a financial liability to be derecognised when, and only when, it is extinguished (ie, when the obligation specified in the contract is discharged, cancelled or expired). When a purchaser borrows from a bank (cash inflow) to pay a supplier (cash outflow) it usually requires little analysis to conclude that the liability to the supplier should be derecognised, and a new liability to the bank recognised. However, when the bank settles the supplier directly, and there’s no immediate cash inflow or outflow from the purchaser’s perspective, it may not be so obvious.
Catriona Lawrie, Director, and James Nayler, Senior Manager, Mazars.
Views expressed are those of the authors