Allocation of Opportunities and Risks in Factoring of Sold Receivables

Working capital measures such as the revolving sale of receivables under factoring programs are currently regaining significant popularity and relevance. This trend is driven by macroeconomic uncertainty, increased liquidity needs and a rise in late payments. Studies suggest that, particularly in the European market, longer payment terms as well as a higher incidence of overdue receivables – and consequently longer DSO (Days Sales Outstanding) – can be observed.¹

Against this backdrop, companies planning such measures are well advised to assess at an early stage whether their economic objectives are compatible with the intended accounting outcomes. Under both IFRS and German GAAP (HGB), the ability to derecognize sold receivables – and the resulting impact on key balance‑sheet KPIs – is subject to qualitative and, in some cases, quantitative requirements. As these requirements have already been addressed in previous editions of this newsletter,² this article specifically highlights selected pitfalls that may affect the quantitative analysis of the allocation of opportunities and risks associated with the assets.

In order to achieve derecognition of sold receivables under IFRS, one of the key considerations is whether substantially all risks and rewards of the assets have been transferred to the purchaser. While a quantitative analysis may be omitted in simpler cases, it is generally required for more complex structures.³ Under German GAAP (HGB), the quantitative derecognition analysis, by contrast, focuses in particular on whether economic ownership of the receivables has been transferred or whether disproportionately high risks have been retained that contradict the assumption of an economic disposal.⁴

For an IFRS‑compliant analysis of the allocation of risks and rewards, the volatility of net cash flows before and after the transfer under the factoring program must be compared.⁵ The standard identifies, among other factors, credit default risk, the risk of late payments or the opportunity of early payments, as well as foreign currency or interest rate risks as potential drivers of such volatility. Depending on the extent to which an entity continues to be exposed to cash flow volatility arising from these risks, IFRS may require full derecognition, recognition of continuing involvement, or continued recognition of the sold receivables on the balance sheet. As the contractual structures that lead to a retention of such volatility can take many forms, the following sections highlight selected practical pitfalls in more detail. 

In practice, arrangements such as so‑called first‑loss guarantees, reserve accounts, or contract components with a comparable effect are frequently observed. Under a first‑loss guarantee, the selling company undertakes to reimburse the purchaser of the receivables for defaulted receivables up to a defined maximum amount. In practice, the determination of this cap varies widely. It is often defined as a percentage of the nominal amount of the receivables sold. Alternatively, the cap may be set as a specified share of the credit‑related receivable defaults actually incurred. Regardless of how the maximum amount is defined, such a guarantee represents the most classic and straightforward mechanism by which companies retain credit risk associated with the sold receivables. 

A comparable effect is achieved through so‑called reserve accounts. As a rule, companies do not receive the full purchase price for the receivables immediately. Instead, portions of the purchase price are credited to reserve accounts and paid out to the company at a later date, subject to certain conditions. While so‑called dilution or dilution‑related reserves typically secure only the legal validity (veracity) of the receivables and are generally not detrimental to derecognition under either IFRS or German GAAP (HGB),⁶ loss reserves are also frequently established. Credit‑related receivable defaults are initially charged against such a reserve account before resulting in a loss for the factor. Any residual balances resulting from lower‑than‑expected defaults often accrue to the selling company. For this reason, these structures are also commonly referred to in practice as variable purchase price discounts. By retaining the prospect of a potential release of the reserve amount, companies continue to participate in opportunities driven by the actual payment behavior of the debtors. 

As a result, both guarantees and reserve accounts leave a certain level of credit risk with the selling company. Under IFRS, the proportion of retained cash flow volatility must be determined, taking into account the characteristics of the receivables portfolio sold. Under German GAAP (HGB) as well, the appropriateness of the level of the guarantee or reserve must be assessed through a quantitative analysis in order to evaluate whether economic ownership of the receivables has been transferred.⁷

In factoring programs, it is common for the selling company to act as servicer and to continue performing receivables management activities. In some cases, however, the factoring agreement also includes repurchase arrangements for specific receivables, for example defaulted receivables, that go beyond these servicing activities. The rationale for such arrangements may include the use of an in‑house group collection entity or the desire to regain strategic decision‑making authority over legal enforcement actions against selected debtors.

However, it is not only repurchases of receivables that may be relevant. In certain industries, extended retention‑of‑title clauses are agreed when goods are sold. Depending on the contractual arrangements, the factor may obtain ownership of the goods by exercising such rights if a debtor defaults. If repurchase arrangements relating to the goods are agreed between the selling company and the factor for these cases, the question arises as to whether the selling company continues to bear the price risk of the goods.

Whether, under IFRS, risks and rewards remain with the selling company as a result of such repurchase arrangements – and to what extent their allocation must be determined as part of a quantitative analysis – must be assessed on a case‑by‑case basis.⁸ Under German GAAP (HGB) as well, it is necessary to analyze individually whether the repurchase mechanisms are detrimental to the derecognition of the receivables.⁹ Under both IFRS and HGB, particular attention must be paid to whether the contracts provide for mandatory repurchases or whether a party merely holds an option to repurchase or resell. In addition, the price at which the repurchase occurs or may occur must be taken into account and analyzed with regard to its potential impact on the allocation of risks and rewards (IFRS) or on the transfer of economic ownership (HGB) of the transferred receivables. 

If receivables are not sold directly to a bank but instead transferred to a special purpose vehicle (SPV) as part of an asset‑backed securities (ABS) structure, additional accounting questions arise. To finance the purchase of the receivables, the SPV issues debt instruments that are structured into different tranches with decreasing seniority. If the selling company retains tranches of these instruments – potentially even the most subordinated tranche – the first step under both IFRS and German GAAP (HGB) is to assess whether the SPV is subject to consolidation.

If the question of a consolidation requirement can be answered in the negative, the next step under both HGB and IFRS is to assess whether the retention of a subordinated tranche results in the selling company continuing to bear risks and rewards arising from the sold receivables.¹⁰ In practice, all cash flows generated by the receivables are often passed on to the special purpose vehicle. Within the SPV, these cash flows typically flow through a waterfall structure, under which more senior creditors – for example, interest payments on senior and mezzanine tranches – are serviced first. Shortfalls resulting from the risks described above, such as credit defaults, foreign exchange movements or changes in interest rates, reduce the cash flows available for distribution to holders of the junior tranche.

The junior tranche can therefore have an effect comparable to the guarantees described above. Whether the resulting risk retention is appropriate in light of the characteristics of the sold portfolio (under German GAAP) or the extent to which risks and rewards are retained as a result (under IFRS) depends on the individual circumstances and must be assessed through a quantitative analysis.

A wide range of contractual arrangements can lead to the retention of cash flow volatility. In some cases, this may give rise to a conflict between economic optimization and the desired accounting outcome. Companies are therefore well advised to address this potential conflict at an early stage when structuring the contracts and to consider which arrangements may lead to the retention of risks and rewards, and to what extent.

The Finance and Treasury Management team would be pleased to support you in addressing these questions and is available for a practical exchange of views and further discussion.

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¹ See EU Payment Observatory – Annual Report 2025. European Commission, https://doi.org/10.2826/0995695; WCR and DSO Report 2025, Allianz Trade, 2025-06-18-DSO-AZT.pdf.
² See KPMG Corporate Treasury Newsletter, Issue 135, 137 and 153.
³ See IDW RS HFA 48, para. 79.
⁴ See Justenhoven/Meyer in BeckBilKo, HGB § 246 margin no. 48.
⁵ See IFRS 9.3.2.7 or IDW RS HFA 48, para. 73.
⁶ See KPMG Insights into IFRS 7.6.160 et seq. under IFRS or IDW RS HFA 8, para. 20 under HGB.
⁷ See IDW RS HFA 8, para. 22 ff.
⁸ See IFRS 9.B3.2.4 et seq. in conjunction with IFRS 9.B3.2.16 et seq.
⁹ See IDW RS HFA 8, para. 11 in conjunction with para. 16 or Justenhoven/Meyer in BeckBilKo, HGB § 246 margin no. 47.
¹⁰ See KPMG Insights into IFRS 7,6,180.40 under IFRS or IDW RS HFA 8, para. 16 under HGB.