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01/03/2024 Comptabilité

Deconsolidating factoring can distort financial reporting

Eric Blain, a member of SFAF's Accounting Committee, explains how factoring can be used by companies to strengthen their cash position. For the benefit of financial analysts, he suggests that companies using this financing technique include it in their balance sheet, to make financial communications clearer. 

Factoring involves transferring trade receivables to a bank, while retaining the risk of payment. This technique is a remarkably flexible source of financing for companies, as it is linked to changes in business activity. It can be linked to short-term financing, which until recently was extremely inexpensive.

Bank advertising banner, late 2023

In the past, this manipulation was widely used at the end of December by finance managers to show a picture of a healthier December 31 balance sheet by transforming "customer" items into cash at the bank!
Accounting rules have now evolved under IFRS to allow this operation to be restated, while maintaining the customer receivable on the balance sheet. This cancels out the perverse effect of this presentation as long as the customer risk is retained by the company, which is the most frequent case. The impact of a factoring contract retaining customer risk is therefore irrelevant to the IFRS financial analyst.
It should be remembered, however, that IFRS standards are not compulsory on Euronext Growth, so it is necessary to deep-dive through the financial report to try and find the amount of factoring and its variation over the year.
Deconsolidating" factoring was born out of the transfer of "customer risk" to the bank, which then enables the company to cut the financial link with its customer on this receivable. This operation is carried out by the banker when he has confidence in the company's customer, since he takes the risk of payment. Thus, if the customer is a "quality" customer (government, public company, CAC 40 company, etc.), the additional cost required by the bank to transform the factoring of a receivable into "deconsolidating" factoring will be extremely low. Low rates and low surcharges go a long way to explaining the boom in "deconsolidating" factoring. 

So why question deconsolidating factoring at all?
This item is very often difficult, if not impossible, to find because it is not defined (otherwise known as factoring, "assignment of trade receivables", etc.) and is not specified as being deconsolidating or not. It may only be found in the financial report, which is not available when the accounts are presented.
This difficulty could be avoided with a simple, clear table specifying :

  • The amount of "deconsolidating" factoring at the beginning and end of the year;
  • its variation over the period for half-yearly accounts.

The biases concerning the use or non-use of these figures are at least 2-fold:

  • The amount of net debt, with its impact on enterprise value;
  • Cash generation by modifying WCR through a change in the status of a factoring contract, or the amount put into deconsolidation.

On the first point concerning debt, basically, if we justify a company's market capitalization by its enterprise value, from which we deduct net debt, the exercise will lead to very different results. Setting up an amount X of "deconsolidating" factoring will reduce net debt at a given moment and increase market capitalization by the same amount X, based on the same enterprise value. Some companies, particularly transparent on this subject, have included in their financial communications a notion of "economic debt" which includes "deconsolidated" factoring, which seems to better reflect the reality of the debt.
On the second point, the significant increase in the amount of receivables placed with "deconsolidating" factoring significantly improves working capital by reducing the "customer" item, and makes it possible to generate cash (Free Cash-Flow) which may only be episodic. Indeed, a variation significantly greater than that of sales cannot be recurrent, and may mislead the analyst if the amounts and variations are not specified.

In conclusion, without getting into a philosophical debate on the treatment of "deconsolidating" factoring, it would be useful if the communication of a simple and clear table on the amount of "deconsolidating" factoring at the beginning and end of the period were included in the practices of companies using this financing technique.  This would show the variation influencing the period's cash flow statement. 

Nb :
Rising short-term interest rates will significantly increase the cost of this technique from fiscal 2023 onwards.
Increasing default risks may also reduce bankers' appetite for deconsolidating factoring. For example, the setbacks experienced by certain players in the "care of dependent persons" sector have led bankers to limit risk-taking in this sector, penalizing the possibility of "deconsolidating" factoring for their suppliers.
Reverse Factoring" involves the implementation of "deconsolidating" factoring, with the customer's banker taking over the receivables of its own customer's supplier.