Factoring:

Factoring programs give companies the chance to sell their receivables to third parties and improve their liquidity. The rules on whether sold receivables can be derecognized by the seller are set out in both IFRS and HGB. Alongside numerous qualitative requirements, which have already been discussed in detail in previous editions of this newsletter¹, this article will focus explicitly on a quantitative aspect of determining derecognition in connection with retained credit risks under IFRS and HGB.

Under IFRS, the extent to which risks and opportunities are transferred must be clarified. To this end, a portfolio analysis of receivables must be performed before and after the transaction. Possible risks to be considered include credit default risk, late payment risk and foreign currency risk. In this context, the variability of the net cash flows from the transferred asset in terms of amount and timing is decisive. Where it is determined that substantially all risks and rewards have been transferred, the derecognition criterion is met. Where risks are retained in part or in full, the sold receivables may only be derecognized in part or not at all.²

The requirements of the German Commercial Code (HGB) are different from IFRS in that they don't look at the variability of cash flows, but rather the appropriateness of a discount to cover credit risks. A discount is deemed appropriate if it's in line with market conditions and sufficient to cover the expected actual losses on the receivables sold. The receivables can be derecognized as long as the discount isn't unreasonably high.³

Both under IFRS and HGB, the structure of retained credit risks plays a decisive role in assessing the derecognition of sold receivables. Sellers can retain credit risks for the transferred receivables to varying degrees. In practice, this can take the following forms, for example:

• First-loss guarantee: The seller assumes a default guarantee up to a certain amount (“first loss”). This means that it is liable for a specified part of the expected payment defaults.
• Guarantee account with variable retention: Part of the purchase price (as a percentage of the nominal value of the receivables) is initially retained and paid into a guarantee account. The buyer can use this account to cover payment defaults. Following a specified period, the remaining amount is paid to the seller as a subsequent purchase price.

Considering the entire portfolio of sold receivables, both forms act as a percentage discount to cover credit risks or determine the extent of the risk retained by the seller. The final purchase price depends on the actual defaults that occur.

Based on the actual receivables portfolios sold, the seller is required to do a quantitative analysis to meet the requirements of both accounting standards. Both standards lay out the rules for this. Under IFRS, IDW RS HFA 48 provides an example of application, but this is not mandatory⁴. For the purpose of assessing the extent of credit risk transfer, the present values of projected cash flows are weighted taking into account expected credit losses for various scenarios with probabilities of occurrence before and after the transaction. After that, the variability is calculated using the standard deviation before and after the transaction. The use of ratios can be a non-mandatory example of how to assess variability before and after a transaction. A ratio below 10% means that basically all credit risks associated with the financial asset have been transferred, so it can be derecognized. If the ratio is above 90%, significant credit risks have been retained, which means that derecognition is not possible. If the ratio is between 10% and 90%, neither a complete transfer nor a complete retention of the risks and rewards can be assumed.

HGB requirements are significantly less specific. Under IDW RS HFA 8, the retained credit risk is considered adequate if the discount does not exceed the actual expected losses of the portfolio, factoring in a premium for the risk of unexpected losses. However, there is no precise definition of the term “unexpected loss.”

In practice, under both IFRS and HGB, the question often comes up about how to actually do this analysis in terms of input and methodology for a real receivables portfolio. Both approaches start with info on the expected default risk of the portfolio at the level of individual debtors. An often-encountered issue is the availability of internal and external data on debtor-specific default probabilities (e.g., derived from term-specific CDS spreads or based on historical defaults). Where this in-formation is available, a statement can be made about the expected probability of default.

However, this alone is insufficient to obtain the necessary decision-making measure for quantitative analysis, which is another issue. Under IFRS, the relevant criterion is the variability of expected credit losses before and after the transaction. For this reason, mathematical and statistical methods should be used to determine a loss distribution for various scenarios with probabilities of occurrence (e.g., Monte Carlo simulation). This allows the variability (e.g., standard deviation) before and after the transaction to be determined.

Although the expected default risk is the main focus of the HGB, the unexpected risk must also be taken into account. Although there are no specific guidelines for this, experts recommend also using a loss distribution and a suitable statistical measure to determine the uncertainty (e.g., standard deviation or value at risk).⁵

When assessing whether receivables can be derecognized in factoring transactions, both IFRS and HGB stipulate that this depends largely on the extent to which credit risks are retained or transferred by the seller. While IFRS requires a detailed analysis of the variability of cash flows, HGB focuses on the adequacy of the discount to cover default risks. In practice, it is challenging to perform a robust quantitative analysis, particularly due to the limited availability of default data and the need for statistical modeling. Our Finance and Treasury Management experts would be delighted to meet you for a hands-on exchange and further discussion.

Source: KPMG Corporate Treasury News, Edition 153, April 2025
Authors:
Robert Abendroth, Partner, Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG
Jan Frederik Richter, Manager, Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG

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¹ cf. KPMG Corporate Treasury News, Edition 137 and Edition 135
² cf. IDW RS HFA 48 Tz. 73 et seqq.
³ cf. IDW RS HFA 8 Tz. 20 et seqq.
⁴ cf. IDW RS HFA 48 Tz. 81 et seqq.
⁵ See Rimmelspacher/Meyer/Girlich, WPg 2019, p. 1147 et seq.