Deconsolidating factoring: all about this financing method

Definition of deconsolidating factoring

What is accounting deconsolidation?

Deconsolidation, which is governed by strict standards, consists of removing a financial asset from a company's balance sheet. Then, it is transferred to another entity which then records this asset on its balance sheet. This operation can be carried out either by a direct transfer of the contractual rights to the Cashflows linked to the asset in question. Or by a commitment to transfer these same rights without delay.

To be considered deconsolidating, this transfer of assets must incorporate substantially all the risks and benefits associated with it and be deemed to be without recourse.
It is necessary to assess the transfer of the risks and benefits associated with the ownership of the asset. This will ensure that it meets the conditions for deconsolidation.

How does deconsolidation work in the context of factoring?

1. The transfer of the asset to the factor. Meaning the transfer from the company to the factoring company of the contractual rights to the Cashflows related to the transferred receivables. In exchange:
   • Either the factor is delegated the collection of payments;
   • Or a bank account is set up in the company's name with a contractual obligation to transfer the Cashflows to it. As soon as a payment is made to the factoring company's current account, the transfer of ownership of the receivable is effective.

    

2. The evaluation of the transfer of risks and benefits related to the asset. For this purpose, it is necessary to look at the benefits and risks recovered by the factor at the time of the transfer of receivables. On the one hand, the factor recovers the right to receive payments and the possibility of exercising the rights attached to the receivable. On the other hand, there are several risks:
   • Credit risk related to the insolvency of the debtor;
   • Dilution risk (concerning litigation risks, possible settlement differences, credit balances or offsets);
   • Carrying risk inherent to late payment in relation to the due date.

What are the advantages?

• Reduce the amount of trade receivables by improving the DSO; DSO ;
• Optimise financial ratios including trade receivables and WCR;
• Reduce the net financial debt from the financial statements;
• Improve the financial autonomy ratio (net financial debt / equity) and the leverage level (net financial debt / EBITDA).

Qui est concerné par l’affacturage déconsolidant ?

Deconsolidating factoring concerns any company that wishes to improve the presentation of its accounts.

It should be noted that this financing solution is particularly used by large companies, and more and more by SMEs and SMIs.

Deconsolidating factoring can be used, among others, to:

• Improve the presentation of their balance sheet at the end of the year for companies listed on the stock exchange;
• Diversify the sources of financing and reduce financial debts in the context of an LBO;
• Remettre les comptes à 0 dans le cadre d’une cession d’entreprise ;
• Generate Cash in the context of external acquisitions;
• Reassure investors on the health of the receivables.

In all cases, the final decision on deconsolidation rests with the company's statutory auditors. They are the only ones allowed to assess the substantial transfer of the benefits and risks inherent in the asset transferred.

Written by Eléonore Berne, on 10/05/2022.