Factoring - Cash Basis

[Snaggletooth]

I have a large S corp ($5 MM) that started out small on the cash basis, and grew large so they never left the cash basis. However, they use GAAP for their financials, and every December I have to convert their financials into cash-basis statements prior to filing their tax return.

Customers are normally good about paying but in today's economy are getting slower and slower. Their receivables are triple their levels of last December, now around $450,000. None of them are over 90 days old. The corporation decided to factor down $400,000 of their receivables discounted at 2%.

Is the $392,000 received for these receivables considered "Revenue Received" for Cash Basis accounting? Before answering, consider that $350,000 of the proceeds were used in paying back loans, and the rest was used for operating expenses., although I don't really think this makes a difference...

[BOB W]

I would show all sales in full and then show factoring as a expense. Just where I'm not sure. Probably next to Interest expense.

Doing this will show their true Gross Profit for analysis purposes.

[outwest]

Depends some on the factoring agreement..

but at it's heart, factoring is borrowing with the receivables as security. Just like any other borrowing, it doesn't create taxable income. Now, when the receivable is collected, you show cash basis income, with the factoring cost as a interest expense.

If the factoring is nonrecourse (unlikely) then the treatment changes.

[Snaggletooth]

On the Right Track

Outwest, thanks for your response. This factoring is recourse (otherwise 2% would never fly).

This entire matter is a discussion between Cash and GAAP. Obviously, the implementation of factoring by itself does not create GAAP revenue -- indeed, the revenue has already been recognized when the receivable was created.

Not the case with cash basis accounting. From one perspective, the factoring collects your receivables immediately, so this is cash basis revenue. From another, the cash is not a collection, but the proceeds of a sophisticated "loan" and thus not revenue. Hence was my question.

By the way, you are the custodian of one of my favorite quotes.

Best regards, Snag

"Nothing can be made foolproof for a sufficiently talented fool" -- Outwest

[outwest]

I think the analysis starts..

from the position the factored receivables are a loan. Then, if the factoring is non recourse, then it changes to a sale and the income is recognized. Quite similar to GAAP.

However, I haven't had much luck finding a tax reference for that position.

Wish I was original enough to author the quote, it's one of the many derivatives of Murphy's Law. It does amuse me also, though.