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Debt Factoring Accounting Treatment

debt factoring accounting treatmentI am doing some consulting work for a Merchant Cash Advance company and we are have some debates about how to recognize the revenue and profit. Industry is the same as factoring. There are 2 current camps: 1 - Since the term is not known (repayment length) and the transaction has been completed (meaning all funds have been advanced), that we recognize the entire sale, cofsale and thus the profit all at one. The collection of the receivable is the only item to be over time (i.e. long terms is a regular inventory item). I have seen a company with an audit opinion for this recognition. 2. Amortize the item over the projected term and split it between interest and principle repayment (how it is not a loan). At best I would defer the profit and recognize as a % of repaid. I see no reason for it to be broken out as interest. As we all know everyone can have their own auditor say one thing and then another will say something else. Any thoughts, comments or ideas would be appreciated.

Answers

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

By the way you worded your post, it appears (to me) that you are approaching (i.e. your use of "sale" and "cost of sale", etc) the transaction from the wrong point of view (industry). . Cash Advances are LOANS and you should structure (accounting, revenue recognition, etc) everything as a lending institution or a bank. This includes setting up ALLL (Allowance for loan loss) reserves. I understand that for Merchant Cash Advances, payments are computed as a percentage of future sales?

1. "Since the term is not known (repayment length)" - the term should ALWAYS be defined. You (your legal team) should find a way have a definite/agreed date or circumstance else you have an open ended loan and you will find it troublesome to enforce collection if things go awry.
2. "the transaction has been completed (meaning all funds have been advanced)" - a loan transaction is complete only when paid in full.

Your income is via interest and fees. Interest income should be recognized when earned. Outright fees are recognized when charged.

David Barbeito
Title: Principal
Company: De La Hoz, Perez
(Principal, De La Hoz, Perez ) |

Good Afternoon Emerson,

Thanks for your reply. I agree 100% with your characterization of this transaction but have you seen literature, etc that supports this conclusion. I have a client in the industry and it's trying to book the gain on the transaction upon the execution of the advance (similar to factoring). I don't agree with this treatment but have not been able to find any specific literature to support my conclusion.

Thanks!

David

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

David, there are 2 schools of thought on the business model. The "loan" side and the "transactional" side. Obviously, I am on the "loan" side and my opinion is that those in the industry want it to be in the "transactional" side to avoid regulations. My opiniion is it is a loan and secured by a share of future credit card sales. Also, i do NOT think you can "factor" unspecific Receivables.

I have NOT had the opportunity to work in the industry so I have NOT researched too deeply on the matter. I have also NOT come across any literature on the matter aside those that were put out by the MCA industry themselves. As far as I know, there has been NO final word from governing bodies (or laws from Congress) dealing with the issue of classification.

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