As interest rates continue to rise and traditional forms of financing (e.g. loans and bonds) become more expensive, the focus is once again on measures to manage working capital. Companies have access to popular and currently increasingly used vehicles for this in the form of ABS transactions or classic factoring.
When implementing such measures, the question regularly arises for companies as to whether the trade receivables sold as part of ABS transactions or factoring agreements may be derecognized. We have already discussed in our Corporate Treasury Newsletter Issue 135/August 2023 to the corresponding challenges and pitfalls in the assessment under international accounting standards (in particular IFRS 9). Where companies that resell their trade receivables also or only prepare separate or consolidated financial statements under German commercial law, they need to take into account the regulations for the disposal of receivables under German GAAP, which are sometimes similar to, but differ in detail from, IFRS.
The German Commercial Code (HGB) does not contain any specific requirements as to when a disposal of receivables should be considered appropriate and recognized in the balance sheet. Rather, guidance to be observed is derived from secondary literature such as IDW RS HFA 8.1
In case the receivables are sold as part of an ABS transaction to a special purpose entity (SPE), which in turn raises funds on the capital market by providing such receivables as collateral, the obligation to consolidate the SPE must first be reviewed in analogy to IFRS (HFA 8, para. 16). If the SPE is required to be consolidated, the receivables sold must not be derecognized in the consolidated financial statements under commercial law.
In assessing the derecognition of a receivable under commercial law, two layers must be considered: The transfer of ownership under civil law and of beneficial ownership. The transfer of ownership under civil law is an absolute but not the only sufficient requirement for derecognition. It is required that all (possibly conditional) legal claims to payment flows to which the transferor is entitled are permanently, irrevocably and unconditionally transferred to the buyer. From experience, the transfer under civil law usually takes place by means of a purchase agreement alongside a transfer in rem in the form of an assignment of the claims to the purchaser. It is mandatory that the purchaser is in a position to exercise all rights typical of an owner, for example, to resell the receivables to third parties (HFA 8 para. 10).
This also includes the question of whether the assignment is permanent or whether there is a firmly agreed re-transfer of the receivables in the sense of a genuine or non-genuine repurchase agreement in accordance with section 340b of the HGB (HFA 8 para. 11). Similarly to the IFRS rules, an open assignment within the meaning of §409 BGB, in which the assignment is disclosed to the debtor, generally meets the requirements for such a transfer of ownership under civil law. While the IFRSs for silent assignments within the meaning of 407 BGB stipulate that the acquirer may notify the debtor of the assignment unconditionally or subject to conditions that take into account the acquirer's typical owner rights and interests, under commercial law, a silent assignment is generally also irrelevant for the derecognition decision (HFA 8, para. 13; BeBiKo §264 HGB para. 47).
It is also generally not detrimental to the transfer of rights under civil law if the seller of the receivables continues to exercise certain rights typical of the owner, such as receivables management and collection (servicing) (HFA 8, para. 10).
Alongside the transfer of ownership under civil law, the transfer of beneficial ownership is of particular importance (Section 246 (1) S2 HS2 HGB). In the event that civil law ownership and beneficial ownership diverge, an asset must be reported with the beneficial owner (BeBiKo zu §246 HGB, Rn 5.). It depends in particular on the extent to which the seller no longer bears "any credit risks" from the receivables sold and these have been transferred in full to the purchaser (HFA 8, para. 7) whether the sale transaction under ABS transactions or factoring programs also results in the transfer of beneficial ownership.
There are no obstacles to the transfer of beneficial ownership if the seller is responsible for the legal existence of the transferred receivables or their proper selection (credit risks), as these are guarantee obligations outside the scope of the credit risk (HFA 8, paragraph 20). Similarly, it is irrelevant for the transfer of beneficial ownership whether the seller is liable for purchase price reductions resulting from the utilization of rebates, bonuses, discounts, etc. (so-called dilution discounts) (HFA 8, paragraph 24). Any reserves created for this purpose are not typically included in the derecognition decision.
In determining the purchase price, the buyer of the receivable generally retains a risk discount for the del credere risk (credit risk). If the purchase price discount is fixed, the sale is deemed to be a non-recourse sale, which is not detrimental to derecognition. If, for illustrative purposes, a high but fixed or non-refundable purchase price discount were defined, this would represent an unfavorable contract for the transferor, but the transfer of opportunities and risks would not be at issue. In analogy to IFRS, a quantitative assessment is not required in this case (BeBiKo on §246 HGB, para. 48).
Where, however, the purchase price discount (or first loss guarantee or reserve) is not fixed or refundable and so depends on the debtors' creditworthiness, then at regular intervals a quantitative assessment must be made as to the appropriateness of the discount charged. Based on the portfolio composition, a suitable method must be selected for the quantitative analysis. An inappropriately high, recoverable purchase price discount means that the seller continues to participate to a significant extent in the opportunities and risks associated with creditworthiness (HFA 8 paragraph 21 et seq.). This means that the receivables sold are not derecognized.
Even though HFA 8, para. 7 explicitly refers to the del credere risk as a key decision-making criterion, the influence of other risks inherent in the receivables must also be analyzed, analogously to IFRS. These could be currency risks or interest rate risks, for instance. Generally, an interest rate is agreed for the nominal amount sold, which must also be paid for periods in which the receivables have already become overdue. This creates a risk of delayed payment, which must generally be borne by the seller until the del credere event occurs. To what extent the retention of this "late payment risk" precludes derecognition for accounting purposes needs to be assessed on a case-by-case basis.
The bottom line is that the derecognition criteria to be applied are mostly similar between IFRS and commercial law, but they differ when it comes to the details. When preparing such transactions, the contract and the risk profile of the portfolio to be sold should therefore also be assessed in the light of commercial law requirements. Our Finance and Treasury Management experts would be delighted to meet you for a lively discussion of the issues that are of most interest to you.
Source: KPMG Corporate Treasury News, Edition 137, October 2023
Authors:
Ralph Schilling, CFA, Partner, Head of Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG
Jan-Philipp Wallis, Senior Manager, Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG
Christopher Wilksen, Assistant Manager, Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG
_____________________________________________________________________________________________________
1 Other sources include Becksche BiKo and the auditor's manual (WP-Handbuch).
