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Hi
I have watched your lectures and I know that insurance against bad debts is provided in “non recourse factoring”. However my cause of confusion has arisen due to 2 reasons
i) In Bpp kit mcq 65, question asked which of the following are benefits of “with recourse factoring” for PKA
a) Fall in bad debts
b) Improvement in liquidity
c) Reduction in receivable staffing costsThe correct ans was B and C, and this is in line with my concept.
2) However there was a past Acca exam question Bold co Dec 2011 and in that question , the question said that the factor expects to reduce the bad debts from 0·9% of turnover to 0·6% of turnover. Here it meant to say in with recourse factoring OR non recourse factoring?
Secondly, in this same question it said that discuss the possible benefits to Bold Co of factoring its trade receivables. And in examiner answer one of the benefit mentioned is that
“The expertise of the factor
It is possible the factor can improve the efficiency of the receivables management of Bold Co due to its expertise in the areas
of credit analysis, credit control and receivables collection. This would lead to a lower level of bad debts” Here lower levels of bad debts are regarding factor with recourse OR non recourse factoring?Whether or not a factor is being used, then a fall in irrecoverable debts is a benefit. Factors are likely to be more efficient at collecting debts and therefore you would expect irrecoverable debts to be lower.
If this were non-recourse factoring, then all 0.9% would be saved. If it is with recourse factoring, then only 0.3% would be save because the company would still suffer the irrecoverable debts, but there would not be as many.Sir as you said that Factors are likely to be more efficient at collecting debts and therefore you would expect irrecoverable debts to be lower
So, in Bpp mcq 65 where the question asked which of the following are benefits of “with recourse factoring” for PKA
a) Fall in bad debts
b) Improvement in liquidity
c) Reduction in receivable staffing costsThe correct ans was B and C
Here even A is also correct answer then? Correct? But Bpp has just marked B and C as correct answers, so have they done mistake here?Because with recourse factoring we would expect some reduction in bad debts and hence as per this concept option A should also be the correct answer
I do not have the BPP Revision Kit with me because I am away from home this week, and so I cannot check the exact wording.
However I can only assume that the have not given option A as correct is because although with recourse factoring is likely to mean a reduction in irrecoverable debts, it is not guaranteed that it will be the case. The other 2 are certain to be the case because otherwise there would be no point in factoring.
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