Accounting for Staffing Factoring
We often get asked what factoring looks like from an accounting perspective. The Best Factoring Companies know that this largely depends on whether your factoring arrangement is with or without recourse. The below example is meant only to illustrate the difference between the two, and we therefore suggest you consult your CPA or accounting professional before adopting or applying any accounting treatment. While the below example uses a Staffing Factoring transaction, it is applicable to all industries from Construction Factoring to Medical Factoring.
Assumptions
In the first example, we’ll assume that ABC Staffing has entered into a non-recourse factoring arrangement. In the second we’ll assume that the agreement is one with recourse. For both we’ll assume that ABC Staffing is factoring $100,000 in invoices and that the agreement calls for a 90% advance, a 3% factoring fee, and a 7% reserve (yes, even non-recourse agreements can include a reserve for probable adjustments…see this Non-Recourse Factoring post).
Without Recourse Example
ABC Staffing records the following entry to recognize the sale of receivables:
Cash 90,000
Due from Factor* 7,000
Loss on Sale** 3,000
Accounts Receivable 100,000
* (7% X $100,000)
** (3% X $100,000 (Factoring Expense))
Assuming timely collections and no adjustments, ABC Staffing would record the following entry once the reserve was collected from the factoring company:
Cash 7,000
Due from Factor 7,000
With Recourse Example
When ABC Staffing factors their $100,000 in receivables, they first need to determine the fair value of the recourse obligation. In this example we’ll assume that ABC Staffing estimates the fair value of the recourse obligation on this $100,000 of receivables to be 5% or $5,000 based on past collection history, etc. This estimated amount would be added to the factoring expense to determine the total loss on the sale of receivables. As a result, their initial entry would look like this:
Cash 90,000
Due from Factor 7,000
Loss on Sale*** 8,000
Accounts Receivable 100,000
Recourse Liability 5,000
*** (Loss on Sale = Factoring Expense ($3,000) + Fair Value of Recourse Obligation ($5,000))
Assuming that the estimated recourse obligation was accurate and there were non-payment adjustments of $5,000, the factoring company would release the remaining reserve of $2,000 ($7,000 – $5,000) to ABC Staffing who would record the following entry:
Cash 2,000
Recourse Liability 5,000
Due from Factor 7,000
Accounting for Staffing Factoring Conclusions
Even though the above examples utilize a staffing factoring company, the mechanics are the same regardless of industry with the primary difference being that a recourse agreement calls for the accounting recognition of the fair value of the recourse obligation itself. If you have any questions, please feel free to Contact Us at anytime.