The ongoing rise in interest rates and the associated increase in the cost of traditional financing (e.g. loans, bonds) is bringing working capital management measures back into focus. With ABS transactions or classic factoring, companies have popular and currently increasingly utilised vehicles at their disposal.
With regard to the accounting effects, the question regularly arises for companies when implementing such measures as to whether the trade receivables sold as part of ABS transactions or factoring agreements may be derecognised. In this context, the Corporate Treasury Newsletter issue 135/August 2023 already referred to corresponding challenges and pitfalls in the assessment according to international accounting standards (in particular IFRS 9). If companies that resell their trade receivables also or only prepare separate or consolidated financial statements under commercial law, the rules for derecognising receivables under HGB, which are sometimes similar but differ in detail from IFRS, must be observed.
Commercial law does not contain any specific requirements as to when a derecognition of a receivable should be considered appropriate and recognised in the balance sheet. Instead, the requirements to be observed are derived from secondary literature such as IDW RS HFA 8.1
If 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 pledging the receivables as collateral, the consolidation requirement for the SPE must first be reviewed by analogy with IFRS (HFA 8, point 16). If the consolidation of the SPE is required, the derecognition of the receivables sold in the consolidated financial statements under commercial law must be denied.
Two levels must be considered for the assessment of a derecognition under commercial law: The transfer of ownership under civil law and the transfer of economic ownership. The transfer of ownership under civil law is a mandatory, but not sufficient, requirement for derecognition. It is required that all (possibly conditional) legal claims to cash flows to which the transferor is entitled are transferred permanently, irrevocably and unconditionally to the buyer. Experience shows that the transfer under civil law usually takes place by means of a purchase agreement in addition to a transfer in rem in the form of an assignment of the receivables to the purchaser. It is essential that the purchaser is in a position to exercise all rights typical of an owner, for example to sell on the receivables to third parties (HFA 8 para. 10).
In this context, the question of whether the assignment is permanent or whether there is an agreed retransfer of the receivables in the sense of a genuine or non-genuine repurchase agreement in accordance with section 340b HGB must also be assessed (HFA 8 para. 11). Analogous to the IFRS regulations, an open assignment within the meaning of Section 409 BGB, in which the assignment is disclosed to the debtor, generally fulfils the requirements for such a transfer of ownership under civil law. While the IFRS for undisclosed assignment within the meaning of Section 407 BGB require that the acquirer can notify the debtor of the assignment unconditionally or under conditions that take into account the typical rights and interests of the acquirer, under commercial law, an undisclosed assignment is also generally not detrimental to the derecognition decision (HFA 8, para. 13; BeBiKo Section 264 HGB para. 47).
Furthermore, a transfer of rights under civil law is generally not detrimental if the seller of the receivables continues to exercise certain rights typical of an owner, such as receivables management and debt collection (servicing) (HFA 8 para. 10).
In addition to the transfer of ownership under civil law, the transfer of beneficial ownership is of particular importance (section 246 (1) sentence 2 (2) HGB). If civil law and economic ownership diverge, an asset must be recognised by the economic owner (BeBiKo on Section 246 HGB, margin no. 5.) Whether the sale process in the context of ABS transactions or factoring programmes also results in the transfer of economic ownership 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 buyer (HFA 8, para. 7).
There is nothing to prevent the transfer of economic ownership if the seller is responsible for the legal existence of the transferred receivables or their dutiful selection (credit risks), as these are warranty obligations outside the credit risk (HFA 8, point 20). Furthermore, it is irrelevant for the transfer of economic ownership whether the seller is liable for purchase price reductions resulting from the utilisation of rebates, bonuses, discounts, etc. (so-called dilution discounts) (HFA 8, para. 24). Any reserves formed for this purpose are typically not included in the derecognition decision.
When calculating 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, it is a non-recourse sale, which is harmless for derecognition. If, for illustrative purposes, a high but fixed or non-refundable purchase price discount were defined, this would represent an unfavourable contract for the transferor, but the transfer of risks and rewards would be beyond question. Analogous to IFRS, a quantitative assessment is not required in this case (BeBiKo on section 246 HGB, para. 48).
However, if the purchase price discount (or first loss guarantee or reserve) is not fixed or refundable and therefore depends on the creditworthiness of the debtors, a quantitative assessment of the appropriateness of the discount charged must be carried out regularly. Depending on the composition of the portfolio, a suitable method must be selected for the quantitative analysis. An inappropriately high, refundable purchase price discount means that the seller continues to participate significantly in the creditworthiness-related opportunities and risks (HFA 8 para. 21 et seq.). As a result, the receivables sold are not derecognised.
Even though HFA 8, point 7 explicitly refers to del credere risk as a key decision-making criterion, the influence of other risks inherent in receivables must also be analysed in line with IFRS. These could be currency risks or interest rate risks, for example. As a rule, interest is agreed on the nominal amount sold, which must also be paid for periods in which the receivables have already become overdue. This gives rise to a risk of late payment, which is usually borne by the seller until the del credere event occurs. The extent to which this "late payment risk" prevents derecognition in the balance sheet must be examined on a case-by-case basis.
As a result, it should be noted that the derecognition criteria to be applied are mostly similar between IFRS and commercial law, but there are differences in detail. In this respect, when initiating such transactions, the contract and the risk profile of the portfolio intended for sale should also be analysed in accordance with commercial law requirements. Our finance and treasury management experts will be happy to provide you with a practical exchange and further discussion.
Those: KPMG Corporate Treasury News, Ausgabe 137, Oktober 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
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1 Weitere Quellen sind u.a. der Becksche BiKo, sowie das WP-Handbuch.
