Accrued income for factor

Accrued income for factor

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Dear all

We are an invoice finance/factoring company. We advance 80% of our clients sales invoices to them, their clients pay us and we repay the remaining 20% back to our clients less our fee (if our fee is 3% then we pay back 17%)

We charge a fee based on time elapsed between date of advance and date of receipt. For eg 3% for 30 days 6% for 31 - 60 days.

If we advanced against an invoice on 15 nov 2014. We are expecting that the client's client will pay on 15 jan 2015, we estimate that we will charge 6% of say 10000, so our fee is £600.

Should we accrue the full £600 pr £300 or nothing in nov 14.

Please can someone explain with ref to the accounting standard the governs it.

Replies (13)

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By johngroganjga
02nd Dec 2014 21:20

Why do you not ask your accountant this question?

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Replying to neilbrookes:
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By dumbass
02nd Dec 2014 21:27

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Thanks john

I m trying to save costs. Any answers would really help but if this advise cant be given free online i will understand.

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paddle steamer
By DJKL
02nd Dec 2014 22:09

Prorata looks appropriate

If I have this right you charge 3% for 30 days, 6% for 60 days.

If you have invoices advanced upon on 15 November then on 30 November there are 15 days elapsed since date of advance.

Therefore that equates to 1.5% of the invoice to cover to 30 November 2014.

I would charge 0.1% per day of accrual from advance date to your year end date. This has the advantage of being simple to calculate irrespective of date of each advance. So year end date minus advance date+1 gives days (excel) times 0.1% times invoice value. Easy to calculate on excel if you have all invoices/advances listed on a sheet.

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Replying to tiswas12:
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By dumbass
03rd Dec 2014 03:59

Thanks
I agree but Our previous accountants said as per frs 5 we need to take the full value of £600 into nov.

Is it true?

I shud have mentioned it in my question...

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By johngroganjga
03rd Dec 2014 05:22

What happens if client pays after 60 days plus? What is your fee then? What happens if the client never pays? What is your fee then?

Do I understand correctly that if you advance £10,000 and client pays after 2 days your fee is £300, and that it is also £300 if same client pays after 30 days, but £600 if he pays after 31 days? Or does it accrue on a daily basis, like interest, as DJKL seems to have understood?

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Replying to Tom 7000:
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By dumbass
03rd Dec 2014 07:36

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Fee for 1 to 30 days will be the same 3% or £300. So if paid in 2 days or 30 days its the same.

Its factoring fee, not interest so doesnt accrue on a daily basis.

The things that worry me are:
1. Overestimating the fee
2. Always reporting profit accrued rather than earned so less liquidity.
3. Paying tax on profit that we dont know if we ll make.

Apparently frs 5 requires us to take the total benefit receivable (or received post date, if filing accounts after a couple of months) as accrued income.

I am still researching on frs 5 but meanwhile i thought to asl what accountingweb has to say.

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Replying to coolmanwithbeard:
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By User deleted
03rd Dec 2014 11:44

Your query

[*** wrote:
]Fee for 1 to 30 days will be the same 3% or £300. So if paid in 2 days or 30 days its the same. Its factoring fee, not interest so doesnt accrue on a daily basis. The things that worry me are: 1. Overestimating the fee 2. Always reporting profit accrued rather than earned so less liquidity. 3. Paying tax on profit that we dont know if we ll make. Apparently frs 5 requires us to take the total benefit receivable (or received post date, if filing accounts after a couple of months) as accrued income. I am still researching on frs 5 but meanwhile i thought to asl what accountingweb has to say.

Sorry I'm at a loss to understand the whole thing - what is your query? Do you have an accounting policy for revenue recognition in place? Or are you trying to establish one with the help of this forum and of fRS5? If your business model is likely to create a cash flow situation I'm not too sure how the accounting standard or an interpretation thereof is likely to help.

 

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By User deleted
03rd Dec 2014 07:24

Of the three categories of revenue recognition namely sale of goods, rendering of services and interest, this one looks closer to interest. From memory the 3% should initially be credited to unearned finance charges, subject to what the terms of the contract say, and recognised pro-rata. Generally these are recourse cases and assumption is that the clients are obliged to pay you back including the full 3%/6%, should the assigned debt become unrecoverable.

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By johngroganjga
03rd Dec 2014 09:17

You haven't answered the questions about what your fee is if payment is made after more than 60 days, or what happens if the debtor never pays at all.

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Replying to Mallock:
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By dumbass
03rd Dec 2014 10:31

Fee
Over 60 days is 9% over 90 days is 12%. If we cant receive money from clients client we will chase client for payment. If client goes bust. We lose all our fee plus the advance we paid. So we make a loss.

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paddle steamer
By DJKL
03rd Dec 2014 10:43

Application note C

http://frc.org.uk/Our-Work/Publications/ASB/FRS-5-Reporting-the-Substanc...

If you read FRS5, application note C, you will note that it indicates that the part of the factoring charge that pertains to interest in the accounts of the party selling the debt to the factor should accrue with time. I cannot see reference to how the factor should recognise, but to me common sense (appreciate out of fashion in accountancy these days) and prudence suggest the same approach.

These days  the FRS/ SORPS/Accounting Standards etc are not my thing, for the work I do 99% of the time the FRSSE and a bit of common sense covers all I need/ or care to know, but I am finding it hard to square taking charges for the full 30 days if advance made before year end am finding it even harder to justify taking re days 31-60 occurring post ye by reviewing what happens post ye.

The latter point just makes no sense, if the argument is the advance is made pre year end therefore all benefits re it accrues to the year the advance was made within and compare it with the scenario where the seller of the debt repays it day 30 and redraws day 31 to restart the clock so the second period would have no connection with the period pre year end, you can see that in reality this is actually a perversion of substance over form.

In reality, when all is said and done, I suspect the bulk of the charge is really interest on advancing funds secured against the debtors, the fact that the accrual rate is smooth  comparing 0-30 and 31-60 reinforces that view, so the substance of the transaction to me looks like it is a financing matter with interest being charged, whether called that or not, and  as interest usually has a time value  it ought to accrue with time.

Afraid after this post you are on your own with FRS5 re my input, re financial reporting I have the attention span of a gnat.

 

 

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By johngroganjga
03rd Dec 2014 11:48

Yes he's trying to establish a compliant accounting policy for recognisiing this income.  That's what this thread is about.

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By dumbass
03rd Dec 2014 11:53

Thanks DJKL

The whole point of the debate is that we are probably thinking we are making profit, taking future fee into consideration, when we are not, or not as much.

We produce two reports, one tells us income if we were to receive all our money today (month end) and other, which we take 20 days in future. Now this makes a lot of difference because the rates are different for each client and charging period varies as well ie For some clients fee changes in 14 days.

On the other hand, the kind of business we are in, we don't think we will ever make profit if we were to collect all our debt in the first charging period, the profit making debts are over 30 days.

I guess I will have to input our normally estimated figures into accounts. Until we get an argument that the boss can agree on. (or a clearer guidance in FRS 5)

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