How does IFRS 9 affect the accounting treatment of invoices sold under a factoring arrangement?
Under IFRS 9, a business must assess whether it has transferred substantially all the risks and rewards of ownership of a receivable before it can derecognise the asset from its balance sheet. With non-recourse factoring where bad debt protection is in place, derecognition is often achievable, but with recourse facilities the receivable may need to remain on the balance sheet as a secured borrowing. Businesses preparing IFRS-compliant accounts should discuss the structure of their facility with their auditors early to agree the correct treatment.
What this means for your business
For a UK SME using invoice finance, IFRS 9 determines whether sold invoices can be removed from your balance sheet or whether they must remain as a liability. This matters because derecognition affects how your accounts look to lenders, investors and credit agencies. The key test is whether your business has transferred substantially all the risks and rewards tied to those receivables. Under a non-recourse facility, where a funder absorbs bad debt risk, derecognition is generally achievable. Under a recourse facility, where your business remains liable if a customer does not pay, the invoices typically stay on the balance sheet as a form of secured borrowing. Understanding this distinction helps you present your financial position accurately and avoid surprises during audit.
Key points
- IFRS 9 applies to UK companies that prepare accounts under international accounting standards, including AIM-listed and certain larger private businesses.
- The derecognition test under IFRS 9 requires a business to assess whether substantially all the risks and rewards of a receivable have passed to the funder.
- Non-recourse factoring arrangements, which include bad debt protection, are more likely to meet the derecognition criteria than recourse facilities.
- Where derecognition is not achieved, the proceeds received from the funder must be recognised as a financial liability rather than as income.
- Businesses should engage their auditors at the outset of any new invoice finance arrangement to agree the correct accounting treatment before the year-end.
Common pitfalls
A common mistake is assuming that selling invoices automatically removes them from the balance sheet. Without a proper IFRS 9 assessment, businesses can misstate their financial position, which may cause difficulties with auditors or breach loan covenants. Another error is failing to review the accounting treatment when a facility switches from non-recourse to recourse terms, or when credit insurance is removed, as either change can affect derecognition eligibility. Leaving this conversation until the final stages of an audit adds unnecessary pressure and can result in material restatements.
Related questions
Does IFRS 9 apply to all UK businesses using invoice finance?
IFRS 9 applies to UK entities that prepare their financial statements under UK-adopted international accounting standards. Smaller businesses preparing accounts under FRS 102 follow a different but related framework, so the derecognition principles are similar but not identical. If you are unsure which standard applies to your business, your accountant or auditor will be able to confirm this.
What is the difference between recourse and non-recourse factoring for accounting purposes?
With non-recourse factoring, the funder takes on the credit risk if your customer fails to pay, which generally supports the removal of the receivable from your balance sheet under IFRS 9. With recourse factoring, your business retains that credit risk and must typically keep the invoice on the balance sheet as a secured borrowing. The distinction has a direct impact on your reported debt levels and net asset position.
How should a business document its IFRS 9 assessment for a factoring arrangement?
Your business should retain a written analysis of the risks and rewards transferred under the facility, cross-referenced to the specific terms of your factoring agreement. This documentation supports your audit file and demonstrates that management has applied proper judgement. It is good practice to update this assessment whenever the terms of your facility change materially.
Director, Market Invoice
Oliver leads Market Invoice's editorial and comparison research. With a background in UK commercial finance, he oversees provider analysis, rate verification, and industry reporting across all verticals.
Last reviewed: 9 June 2026