Invoice discounting accounting: what to check

Invoice discounting accounting depends on the legal agreement and the reporting framework your business uses. Do not assume that an assignment of invoices means they disappear from the balance sheet. Your accountant must assess the actual transfer of risks, rewards and other relevant conditions.

Start with the agreement

Give your accountant the executed facility documents, recourse and protection terms, opening statement and fee schedule. Product marketing phrases such as “release your own cash” do not determine the accounting. The financial substance and the applicable standard matter.

Keep three records connected

Reconcile the customer sales ledger, the provider's funding statement and the bank. A customer receipt, a provider drawdown and revenue are not interchangeable transactions. Avoid posting money received from the funder as a new sale; the underlying sale has its own revenue recognition requirements.

An example of what to reconcile

Suppose an invoice is £10,000 and an initial drawing is £8,500. Your reconciliation should separately identify the £10,000 customer debt, the £8,500 funded amount and any fees or reserve. What appears in the statutory accounts depends on the accounting assessment; this example identifies amounts to reconcile rather than prescribing accounting entries.

When the customer pays, reconcile the receipt and the reduction of the funded position. Check how service fees and discount charges appear on the provider's statement and whether they have already been debited or remain payable.

When can invoices be removed from the balance sheet?

Ask your accountant whether the unpaid invoices should remain on the balance sheet, whether the funding should be recorded as a liability and how any continuing risk is treated. Removing an asset from the balance sheet is called derecognition. A recourse obligation, retained risk or other contractual feature can affect that assessment. “Non-recourse” is not enough on its own to settle the question.

FRS 102 and other frameworks

UK reporting may involve FRS 102, FRS 105 or IFRS, depending on the entity and circumstances. The FRC publishes current UK standards and updates. Confirm the version applicable to your accounting period; do not reuse an old internet journal example without checking the current requirements.

Fees and VAT

Separate financing charges, service charges and other costs in the records as your accountant advises. VAT treatment can differ by component and the business's circumstances. Use the provider's actual tax documentation and seek tax advice where needed.

Monthly control checklist

• Reconcile customer balances and provider statements.
• Investigate unmatched receipts and unrecorded credit notes.
• Check the funded balance and fees independently.
• Record any material restrictions, security and commitments for reporting review.
• Keep the accountant informed when the facility changes.