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Hi Tutor,
I have a question about factoring – recourse and factoring non-recourse.
For 89 Widnor Co – BBP kit. In this case: Factoring-recourse, the answer has: ‘Savings in bad debts”
But, for Sep-Dec ACCA past paper. There are 2 options in this question.
+ Option 1: Factoring – resource, the answer has not include :” Savings in bad debts”.
+ Option 2: Factoring – non resource, the answer has include: “Bad debts saved”.It may be conflict above. I am so confuse, the bad debts should include in the factoring – resource or factoring non-resource.
Thanks tutor.
The BPP answer and the ACCA answer are both correct. You are confusing two separate things.
As I explain in my free lectures on this, non-recourse factoring means that it is the factor who suffers any bad debts and the company using the factor therefore suffers no bad debt. With-recourse factoring means that the company still suffers any bad debts.
However even if it is with-recourse factoring, it is likely that bad debts will reduce because the factor is more efficient at collecting money from receivables. In the BPP question the factor manages to reduce the bad debts by 70% and so even though the company will suffer the remaining bad debts, they will be saving money because of the factor being better at collecting money. They will only be saving the 70% (because it is with recourse factoring). Had it been non-recourse factoring then they would have saved all of the bad debts.
Thanks tutor, I nearly understand your answer. I have a question that in Sep-Dec ACCA past paper, option 1: recourse factoring, the company still have the finance cost for its bad debt, why the answer doesn’t include it ?
You will have to tell me which year the Sep-Dec past paper you refer to is from.
The examiners answer does effectively include it because receivables always include bad debts ( it is only later if they do not pay that they are written off).
Thanks tutor, i just understand what you said. Now, I understand that AR has included in bad debts, bad debts has been included in AR (option 1). And option 2, AR has included in bad debts, but it is non-recourse factoring, so bad debt is reduce leading to the statement: “Saving bad debts”.
Thanks tutor a lot !
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