Treatment Of Factoring And Capitalization Of Borrowing Cost – IFRS

Factoring with or without recourse or without recourse?

Factoring accounts receivables means selling the receivables to financial institutions at discount.

Save Time On Research and Writing
Hire a Pro to Write You a 100% Plagiarism-Free Paper.
Get My Paper

Factoring with or without recourse or without recourse? 

Factoring With recourse: Factoring is common practice amongst the companies. In this case, Dynamics might have sold its receivables for meeting the immediate cash needs. Rather than waiting for the due date, the company was in need of quickly converting the receivables into cash but selling to factor, which is usually some percentage of the total value of the receivables that are being factored. Dynamics has followed recourse factoring in this case. In this case, the company has sold the invoices to the factors, with the promise that the organization will be purchasing the uncollected invoices  (IRS, 2006; Soufani, 2002; EUF, 2016).

Factoring Without Recourse: In the case when account receivables are factored with the resource, then factor bears the loss resulting from the bad debts. For instance, if receivable whose account has been factored becomes completely bankrupt and the due amount from him cannot be collected, then the factor will be bearing the loss (IRS, 2006; Soufani, 2002; EUF, 2016).

What should Dynamics do?

Save Time On Research and Writing
Hire a Pro to Write You a 100% Plagiarism-Free Paper.
Get My Paper

The factoring tool has given the dynamics company some benefits as the technique is capable of going after the borrower in case they default  (IRS, 2006; Soufani, 2002; EUF, 2016) . The amount of risk involved for Dynamics company is very less in comparison to that for the applicant, as the borrower is on the hook of uncollected payments. From the view point of borrowing company, the process of recourse factoring is affordable but, it requires the company for absorbing the risks of the uncollected invoices

The account receivables are basically mentioned in the balance sheet. However, they are considered as an off- balance sheet financing. This clearly shows that they are not listed on the balance sheet as it is a contingent asset whose financing factor is secured from the sources which are anything but other hand the equity investor. Although, it has not been included as the elements of the calculation of the assets and liabilities on the balance sheet. The full disclosure enquires the financing arrangements, which are to be listed in the footnotes of balance sheet (Hartmann-Wendels, 2012). The procedure of factoring has given the company an advantage of offering additional options of financing.

What did the accountant do?

The process of factoring has allowed the company in obtaining the additional financing source without even breaking the covenants of the existing loan, which basically limits the capability of the business in incurring the debts. As the main transaction is based on the system of factoring, the accountants noticed that the receivables of the company have been analyzed in respect of the recoverability and the fees of the same has been agreed upon in between the factor and the seller. In addition to it, a factor also retains the smaller percentage of receivables for the portable adjustments based on discounts and returns (Accountingformanagement, 2018; Rai University, 2013; Farag, 2013).

Bank Dr.

What should Dynamics do?

         To Loan Cr.

(For the amount received from A)

In this case, company A will be compensating company in case of Bad debt and even receivables are still rewarded in company A

Factoring Without Recourse

Journal entry

Risk and Reward transferred to factor

Bank Dr.

         To Receivables Cr.

(For the amount received from B)

In this case, company B (Factoring) will be compensating company in case of Bad debt

Dynamics Company commenced the construction of the new distribution centre on the date of 1st April 2016 and the centre was available for use on 30 November 2016. According to the given information:

8 months 1 month

1 April 2016 (Construction started)              30 November 2016                             31st Dec 2016

9 month

The loan was taken from two banks. One of the banks financed the loan at 6 percent interest and the other bank financed the loan at 4.5 percent interest rate. Now, by ignoring the depreciation rate in respect of the construction of the new distribution centre, interest expenses have been calculated as below:

Weighted average interest: The loan that has been borrowed for the qualifying asset and the general usage in business is considered as general Loan (weighted average). In this situation, the borrowing cost which is eligible for the capitalization will be calculated as the expenses associated with the qualifying asset at the time of accounting are to be multiplied with the weighted cost of borrowing of the company in respect of the loan taken by the company (Readyratios, 2014).

Bank Loan Interest (borrowing): This type of borrowing is specifically borrowed for the construction of the qualifying asset. In such situation, the borrowing cost which is eligible for the capitalization is analyzed as actual borrowing cost on the asset minus the income from temporary investments (Readyratios, 2014)


Interest expense:

6% of 2 million = 120000

4.5% of 3 million= 135000

Total amount = 255000

Weighted average interest rate = 255000/ 5 = 0.051 *100 = 5.1 percent

The weighted average interest rate’ calculation has been done, as we were in need of determining the interest rates on the consolidated loan value that combines the two types of loans.

5.1 percent is the aggregate if all interest payment rates in the measurement period and has been divided by the total amount of debt. The formula applied for calculating weighted average interest rate is aggregate interest payment divided by the aggregate debt outstanding (Edvisors, 2018; Frascanada, 2017; Readyratios, 2018).

Amount of the borrowing cost = 4.5 *5.1%* 8/12 = 153000

Journal Entry

PPE 153000 Dr.

         To Bank                      153000 Cr.

IAS 23: This accounting standard talks about the borrowing costing. The standard helps in explaining that the cost of borrowing is attributable to the acquisition of the asset, which are qualified and are included in asset costing (IAS Plus, 2018).

IFRS 9: The standards of IFRS 9 are associated and promulgated by the OASB. The IFRS 9 standard looks into the information of the accounting for the instruments of finance. These types of standards comprise of the needs of determination and measurement of the accounting schemes (IAS Plus, 2018).

What did the accountant do?

IAS 32: The standards of accounting basically outlines the requirements for the representational the instruments of finance, basically towards the determination and illustration of the financial instruments into financial assets and instruments of equity. The borrowing standards also give some sort of guidance which are associated with the classification of the interest and the profits and losses in case financial assets and liabilities that can be offset (IAS Plus, 2018). 

The cost of borrowing of the interest and the other costing, which has been incurred by the organization in respect of the borrowing of the varied funds from the banking institution, looking from the technical view, the borrowing cost mainly refers to the expenses of loan like the payments of the interest which has been incurred from the loan or any such borrowings  (Cleartax, 2018; PWC, 2008).

The cost of borrowing does not comprise of the imputed and the actual costing of the equity capital and depreciation which is not much catalogues as the liability pursuant (IMF, 2003; MCA, 2018).

The borrowing costing is basically attributable towards the acquisition and construction of the assets, which are qualifying and needs to be capitalized as the part of the cost

The treatment of the accounting standards of the borrowing cost is that each and every borrowing costing needs to be expensed in the specific time periods in which they have been incurred in reality. The treatment which is allowable is that the costing of the borrowing is associated with the qualifying business centre asset is required to be treated as part of the cost of the asset

After analyzing the situation of the company, it seems that the option of general borrowing is quite effective for the Dynamic Company. The rate of capitalization is going to be weighted average of the cost of borrowing which is quite applicable to the general pool.

The organization of the International Accounting Standard Committee was brought into existence in the year 1973 with the agreement that was undertaken by the institutions of professional accounting of major countries (Deloitte, 2018). The organization aims to harmonize the accounting standards at international level (Deloitte, 2018).

IFRS since its inception has aimed to develop high quality accounting standards that serves the purpose of global accountancy. These are known as IFRS Standards. The main aim of this institution is to bring transparency along with accountability in the financial markets across the globe (IFRS, 2018).

Huge efforts are being taken by international accounting institutions in order to come up with global accounting standards and it is not wrong to say that the destination of global accounting standards is not too far (Minter, 2000). Global accounting standards will help to revolutionize the accounting practices at global level as well as will work as an aid to accounting professionals. The impact of this can be seen on the investors as well as all the companies despite of the fact of their size. Global accounting standards will prevent from undertaking any misleading financial accounting as well as will also help the accounting professionals to refer to a common set standard in case of doubt (Albu, et al., 2014).

Factoring Without Recourse


The current accounting standards differ from country to country and hence create confusion for accounting professionals to deal with. A single accounting standard will help in dealing with this issue as this will enhance the comparability between different countries. This will free the businesses from the restriction faced because of the national level accounting standards (Freedman, 2018).

Improvement in the flow of capital

Global accounting standards will increase transparency as well as convergence and this will have a direct impact on the flow of capital in the international markets. This will help the investors to easily compare between different businesses (Cole-Ingait, 2018).

Enhanced efficiency

A single set of standards will help the investors to find opportunities across the globe according to their needs. This will save the cost of capital along with costs of international reporting (IFRS, 2018).


International accounting standards will help to deal with different organizational cultures being followed in different countries. It will develop a unified code of accounting ethics which will be accepted at global level. This will reduce disputes is companies undertaking business activities in different parts of the world and the companies will have a specific legal guideline to be followed (Ingram, 2017).


The basic purpose served by IASC by leveraging the single set of standards is, harmonizing the global standards of accounting with an aim to provide a single platform to the accounting professionals. Global accounting standards has a distinct feature and this is it will work on the basis of principles instead of rules (Carmona & Trombetta, 2008).

Economic benefits

Adoption of a single set of accounting standards will have a direct impact on the international economy. Large sums of capital will start to flow with this and the impact of this can be seen on the share market as well as on the FDI increases. This will boost the economy and hence will bring a revolution in the international economic conditions (Jeanjean & Stolowy, 2008).

  • Enforcement is always going to be a big issues in the case of adopting the global standards associated with the accounting norms. The main reason behind this particular part is that enforcing is considered to be a universal set of the global accounting standard on each country cannot serve out the main goal of the each and every specific country. The state of development and even the maturity of the economy of the country will be acting as the limitation for the adoption of the standards which are global. The other side, nationalism is also one of the effective factor which stands as a big hurdle in front of the adoption of the standards of global accounting (Joshi, et al., 2008).
  • Some also argue that there are different varieties of capitalism across the globe and it is a difficult task to make a global accounting standard that suits every economy of the world. Hence, it is also been seen as a possible restriction to many capitalism that has the ability to develop. It is also criticized by some by saying that it restricts the alternative as well as other best ways of doing a business. Hence, many political as well as economical restrictions act as a hurdle in the adoption of global accounting standards (Walker, 2010).
  • Another obstacle is that it is believed that the global accounting standards will negatively impact the small sized organizations as the set principles will be according to the principles of large institutions and hence, small firms and also medium firms to a certain extent will find difficulty in dealing with the global accounting standards (New England College, 2018).
  • It has been suggested that universal standards alone cannot satisfy or cannot achieve the goal of universal financial reporting. Detailed application guidance will be demand across the globe in order to implement this in a successful manner and this act as a major hindrance in front of the IASB (Ball, 2012).
  • Reliable fair value measurement along with the definition of the entities that needs to be consolidated is some of the obstacles in front of the adoption of global accounting standards (Schipper, 2005).


Hence, it can be said that there are a number of restriction sin front of the adoption of global accounting standards and in order to become successful several efforts are being taken by the international institutions. The benefits attached to the adoption of global accounting standards are far huger than its limitation and hence, the institutions should work the limiting factors and should come up with possible solutions as huge opportunities will be opened that will transform the practices of accounting and along with it the economy across the globe. Acquiring the single set of standards of accounting is difficult to achieve but, it is not impossible and hence the work should be kept up and soon the experts will find a solution to the problems being faced by them.


Accountingformanagement, 2018. Factoring accounts receivable. [Online] Available at:
[Accessed 17 May 2018].

Albu, C. N., Albu, N. & Alexander, D., 2014. When global accounting standards meet the local context—Insights from an emerging economy. Critical Perspectives on Accounting, 25(6), pp. 489-510.

Ball, R., 2012. International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and Business Research , 36(1), pp. 5-27.

Carmona, S. & Trombetta, M., 2008. On the global acceptance of IAS/IFRS accounting standards:. Journal of Accounting and Public Policy, Volume 27, pp. 455-461.

Cleartax, 2018. Borrowing Costs. [Online] Available at:[Accessed 16 May 2018].

Cole-Ingait, P., 2018. What Are the Benefits of International Accounting Standards?. [Online] Available at:[Accessed 2018].

Deloitte, 2018. International Accounting Standards Committee (IASC). [Online] Available at:
[Accessed 2018].

Edvisors, 2018. Calculating the Weighted Average Interest Rate. [Online] Available at:[Accessed 18 May 2018].

EUF, 2016. Factoring and Commercial Finance: An Introduction. [Online] Available at:[Accessed 18 May 2018].

Farag, I. A., 2013. Factoring and Accounts Receivable Discounting. An Evidence from the Egyptian Market. [Online]
Available at:
[Accessed 17 May 2018].

Frascanada, 2017. Borrowing Costs. [Online] Available at:[Accessed 17 May 2018].

Freedman, J., 2018. The Advantages of Single Set of Global Accounting Standards. [Online] Available at:[Accessed 2018].

Hartmann-Wendels, T., 2012. Accounts receivable management and the factoring option: Evidence from a bank-based economy. [Online]
Available at:
[Accessed 17 May 2018].

IFRS, 2018. About us. [Online] Available at:[Accessed 2018].

IFRS, 2018. Why global accounting standards?. [Online] Available at:[Accessed 17 mAY 2018].

IMF, 2003. Financial Markets, s.l.: IMF.

Ingram, D., 2017. What Are the Benefits of International Accounting Standards?. [Online] Available at:[Accessed 2018].

IRS, 2006. Factoring of Receivables. [Online] Available at:[Accessed 17 May 2018].

Jeanjean, T. & Stolowy, H., 2008. Do accounting standards matter? An exploratory analysis. Journal of Accounting and Public Policy, Volume 27, pp. 480-494.

Joshi, P., Bremser, W. G. & Al-Ajmi, J., 2008. Perceptions of accounting professionals in the adoption and implementation of a single set of global accounting standards: Evidence from Bahrain. Advances in Accounting, incorporating Advances in International Accounting, Volume 24, pp. 41-48.

MCA, 2018. Borrowing Costs. [Online] Available at:[Accessed 17 May 2018].

Minter, F., 2000. Global accounting standards. Strategic Finance, 82(5).

New England College, 2018. The Pros and Cons of Global Accounting Standards. [Online] Available at:[Accessed 2018].

PWC, 2008. A practical guide to capitalisation of borrowing costs. [Online] Available at:[Accessed 17 May 2018].

Rai University, 2013. Factoring – Theoretical Framework. [Online] Available at:[Accessed 17 May 2018].

Readyratios, 2014. Borrowing Costs. [Online] Available at:[Accessed 22 May 2018].

Readyratios, 2018. Borrowing Costs. [Online] Available at:[Accessed 16 May 2018].

Schipper, K., 2005. The introduction of International Accounting Standards in Europe: Implications for international convergence. European Accounting Review , 14(1), pp. 101-126.

Soufani, K., 2002. The decision to finance account receivables: the factoring option. Managerial and Decision Economics, 23(1), pp. 21-32.

Walker, M., 2010. Accounting for varieties of capitalism: The case against a single set of global accounting standards. The British Accounting Review, Volume 42, pp. 137-152.