Question

Green-Orr Limited (GOL) is a retailer of various fast-moving consumer goods (FMCG’s).

Due to the COVID-19 pandemic the entity has experienced reduced operating margins and liquidity concerns. As part of their process to manage liquidity concerns, they have considered factoring their accounts receivable (debtors’ book). Below is an extract from the notes to GOL’s financial statements as at 31 July 2020:

Description	2020 (R)
Trade Debtors	2 000 000
Provision for Doubtful Debts	(150 000)
Prepayments	200 000
Trade and Other Receivables	2 050 000

GOL has approached DBC Bank for assistance with the factoring transaction. Below is a brief summary of the bank’s terms:

1.) DBC will give 80% of the value of accounts receivable as at 31 July 2020 to GOL. The remaining 20% will be recovered by DBC and paid over to GOL.

2.) The fee is 7.5% of the accounts receivable amounted stated above.

In terms of International Financial Reporting Standards (IFRS) 9: Financial Instruments, discuss how accounts receivable should be measured in GOL’s financial statements. In addition, provide the initial journal entry (debit/s and credit/s) if GOL decided to enter into the factoring agreement (14)

Answer 1

FACTORING:
Factoring is a financial transaction and a type of debtor finance in which business sells its accounts receivable( i.e .invoices )to a third party( called a factor) at a discount.A business will sometimes factor its receivable assets to meet its present and immediate cash flows.
GOL Accounts Receivable as on 31st July 2020
Particulars	Rs
Trade Debtors	2000000
Trade and other receivables	2050000
Total Trade Receivables	4050000
Assistance by DBC Bank ltd :
DBC provides 80% of the value of accounts receivables as on 31st July 2020	3240000
DBC recovers 20% and paid over to GOL	810000
	4050000
Less: Fees for DBC 7.5% of 4050000	303750
	3746250
Journal entries:	Dr	Cr
Bank A/c Dr	2936250	-
Due from factoring A/c Dr	810000	-
Fees on factoring A/c	303750
To Accounts Receivbles A/c	-	4050000